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ruskin ruskin
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7 years ago
Crofton Inc. is evaluating new machinery in its foundry. The machinery would replace existing equipment. The new machinery would cost $230,000, would last 5 years, and would have a salvage value of $28,000. The existing machinery currently has a net book value of $52,000 and could be sold for $38,000. If kept, the old machine would have a salvage value of $6,000 in 5 years' time. The new machinery is expected to lower direct labour costs by $18,000 per year. The current variable overhead rate is 120% of direct labour. Other annual cost savings are projected to be $30,000. Due to the reduction in the production cycle time, working capital requirements will decrease by $25,000 during the life of the new machine. Ignore income taxes.

Required:
a.   Compute the net present value of replacing the existing equipment at a 9 percent required rate of return.
b.   Compute the internal rate of return.
Textbook 
Cost Accounting: A Managerial Emphasis, Canadian Edition

Cost Accounting: A Managerial Emphasis, Canadian Edition


Edition: 7th
Authors:
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#1
7 years ago
a.
CF0 =    ($167,000)    = [-$230,000 + $38,000 + $25,000]
CF 1 to 4 =       $69,600       = [$18,000 +($18,000 * 120%) + $30,000]
CF 5 =       $66,600    = [$69,600 + $28,000 - $6,000 - $25,000]

Initial investment      ($230,000)
Salvage of old      $38,000
Working capital   Increase CF   $25,000
ACF   $69,600 ann 5n 9%   $270,720
Incremental salvage   ($28,000-$6,000) 5n 9%   $14,298
Increase to working cap   ($25,000) 5n 9%   ($16,248)
NPV      $101,770

NPV = $101,769.93   

b.
IRR by calculator = 30.54%
-Michigan State University
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