Question

Exercise 9-12 Garrett Boone, Ayayai Enterprises' vice president of operations, needs to replace an automatic lathe on the production line. The model he is considering has a sales price of $259,049 and will last for 6 years. It will have no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $36,500 per year. He also believes the lathe will reduce energy costs by $28,750 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,311. Click here to view the factor table. (a) Calculate the lathe's internal rate of return. Internal rate of return $ % (b) If Ayayai Enterprises uses a 12% hurdle rate, should Garrett purchase the lathe?

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

Answer 2 3 Parta) 4 Internal Rate of Return 5 Present value of inflow = present value of outflow 6 (36500+28750) * present value annuity (n%,6)) = (259049-5311) 7 Present value annuity (n%,6) = 253738/65250 8 Present value annuity (n%,6) = 3.8887 10 From present value annuity table, annuity of 3.8887 is for 14%,6 Years 11 n% = 14% 12 13 Thus the internal rate of return = 14% 14 15 Part b) 16 Yes the garnett should purchase the lathe. 17 18 Explanation Since the hurdle rate of 12% is less than internal rate of return, so the investment should be accepted. 19