our_ PRINTER VERS?ON -BACK needs to r it could be sold as scrap for $2,600. Mana

ID: 2408068 • Letter: O

Question

our_ PRINTER VERS?ON -BACK needs to r it could be sold as scrap for $2,600. Managers have identified a potential replacement machine, Euromat's Model HD-435s. The HD 435 S priced at $52,681 and would cost Marigold Fashions $36,000 in annual cash operating costs. The machine has a useful life of 14 years, and any salvage value at the end of that time. not expected to have (a) C displayed in the factor table provided and round final answer to 0 decimal place, eg. 58,971.) Net present value (b) Calculate the internal rate of return on the HD-435. Internal rate of return (c) Calculate the payback perlod of the HD-435, (Round answor to 4 decimal places, e-g. 13.2515 Payback period years (d) Calculate the accounting rate of return on the HD-435. (Round answer to 2 decimal places, eg, 11.25%.)

Explanation / Answer

(a) NPV:-

Cost of HD-435

52681

Sale of scrap of existing machine

-2600

Net Cash Outflow (A)

50081

Saving in annual cash operating cost (46000 – 36000)

10000

PVAF @14% for 14 years

6.002

Present value of cash Inflow (10000 * 6.002) (B)

60020

NPV (B-A)

9939

(b) IRR:-

Cash outflow = Present value of cash inflow

50081 = 10000 * PVAF for 14 years

PVAF = 5.0081

PVAF is 5.0081 @ 18%

Hence IRR = 18%

(c) Payback Period:-

Cash Outflow/Annual cash inflow

= 50081/10000 = 5 years approx

(d) Accountng Rate of Return:-

Accounting Profit/Initial Investment

Accounting Profit = Annual saving – Depreciation

Depreciation = 52681/14years = 3763

Accounting Profit = 10000 – 3763 = 6237

Initial Investment = 50081

ARR = 6237/50081 = 12.45%