Farrior Fashions needs to replace a beltloop attacher that currently costs the company $40,000 in annual cash
Question:
Farrior Fashions needs to replace a beltloop attacher that currently costs the company $40,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $2,160. Managers have identified a potential replacement machine, Euromat's Model HD-435.
The HD-435 is priced at $48,720 and would cost Farrior Fashions $30,000 in annual cash operating costs. The machine has a useful life of 11 years, and it is not expected to have any salvage value at the end of that time.
Required
a. Calculate the net present value of purchasing the HD-435, assuming Farrior Fashions uses a 14% discount rate.
b. Calculate the internal rate of return on the HD-435.
c. Calculate the payback period of the HD-435.
d. Calculate the accounting rate of return on the HD-435.
e. Should Farrior Fashions purchase the HD-435? Why or why not?
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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