Question: A corp is considering modernizing its production facility by investing

Question

Question: A corp is considering modernizing its production facility by investing in new equipment and selling the old equipment. The following information has been collected on this investment. Old Equipment New Equipment Cost $80,800 Cost $38,560 Accumulated depreciation $40,400 Estimated useful life 8 years Remaining life 8 years Salvage value in 8 years $4,592 Current salvage value $10,600 Annual cash operating costs $29,600 Salvage value in 8 years $0 Annual cash operating costs $36,000 Depreciation is $10,100 per year for the old equipment. The straight-line depreciation method would be used for the new equipment over an eight-year period with salvage value $4,592. a)Determine the cash payback period (Ignore income taxes). (cash payback period in years) (I know i am supposed to divide the cost of capital investment by net annual cash flow, but every time i get the amounts wrong) b)Calculate the anual rate of return c)Calculate the net present value assuming a 18% rate of return (Ignore income taxes) On this answer I was unable to calculate the annual cash flows so that i could get to the part where I use the PV table d)Should the company purchase the new equipment?

Explanation / Answer

4.076

(2

,00,995.728 / 4.076)

49,312.00

Years PV @ 18% 0 1.000 1 0.847 2 0.718 3 0.608 4 0.516 5 0.437 6 0.370 7 0.314 8 0.266 1 to 8 New equipment $ $ Cost 38,560 1.000 38,560 Life 8 years Scrap @ Yr 8 Nil 0.266 0 Depreciation (P.A.) 4,820 Op. cost (P.A.) 36,000 40,820 4.076 1,66,382.32 2,04,942.32 Annualized cost (2,04,942.32 / 4.076) 50,580.25

4.076

Old equipment PV factor $ $ Original cost 80,800 Less : Acc. dep 40,400 Current cost 40,400 1.000 40,400 Life 8 years Scrap @ Yr 8 (4,592) 0.266 -1,221.47 Depreciation (P.A.) 10,100 Op. cost (P.A.) 29,600 39,700 4.076 1,61,817.2 2,00,995.728 Annualized cost

(2

,00,995.728 / 4.076)

49,312.00

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