Ayayai Fashions needs to replace a beltloop attacher that currently costs the co

Question

Ayayai Fashions needs to replace a beltloop attacher that currently costs the company $41,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $2,230. Managers have identified a potential replacement machine, Euromat's Model HD-435 The HD-435 is priced at $54,201 and would cost Ayayai Fashions $31,000 in annual cash operating costs. The machine has a useful life of 12 years, and it is not expected to have any salvage value at the end of that time. ck here to view the factor table (a) Calculate the net present value of purchasing the HD-435, assuming Ayayai Fashions uses a 14% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.) Net present value (b) Calculate the internal rate of return on the HD-435 Internal rate of return (c) Calculate the payback period of the HD-435. (Round answer to 4 decimal places, e.g. 15.2515.) Payback period years (d) Calculate the accounting rate of return on the HD-435. (Round answer to 2 decimal places, e.g. 11.25%.) Accounting rate of return (e) Should Ayayai Fashions purchase the HD-435?

Explanation / Answer

a) Here, the initial cost = 54,201 - 2,230 = 51,971

Annual savings = 41,000 - 31,000 = 10,000

NPV can be calculated using PV function on a calculator

N = 12, PMT = 10,000, I/Y = 14%, FV = 0 => Compute PV = $56,602.92 is the present value of future cash flows

NPV = 56,602.92 - 51,971 = 4,631.92

b) IRR can be calculated using I/Y function

N = 12, PMT = 10,000, PV = -51,971, FV = 0 => Compute I/Y = 16.00%

c) Payback period is the no. of years it take to recover the initial investment.

Payback Period = Investment / Cash Flows = 51,971 / 10,000 = 5.1971 years

d) Accounting rate of return (ARR) = Net Income / Investment = 10,000 / 51,971 = 19.24%

e) Yes because the NPV > 0 and IRR > discount rate of 14%

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