(Comprehensive; Appendix 2) The management of Syracuse Steel is evaluat¬ ing a proposal to buy a new turning lathe as a replacement for a less effi¬ cient piece of similar equipment that would then be sold. The new lathe’s cost, including delivery and installation, is $710,000. If the lathe is purchased, Syracuse Steel will incur $20,000 to remove the present equipment and re¬ vamp service facilities. The present equipment has a book value of $400,000 and a remaining useful life of 10 years. Technical advancements have made this equipment outdated, so its current resale value is only $170,000.

The following comparative manufacturing cost tabulation is available;

Management believes that if it does not replace the equipment now, the company must wait seven years before the replacement is justified. The company uses a 10 percent discount or hurdle rate in evaluating capital projects and expects all capital project investments to recoup their costs within five years.
Both pieces of equipment are expected to have a negligible salvage value at the end of 10 years.

a. Determine the net present value of the new equipment. (Ignore taxes.)

b. Determine the internal rate of return on the new equipment. (Ignore taxes.)

c. Determine the payback period for the new equipment. (Ignore taxes.)

d. Determine the accounting rate of return for the new equipment. (Ignore taxes.)

e. Determine whether the company should keep the present equipment or purchase the new lathe. Provide discussion of your conclusion.

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Present Equipment New Equipment Annual production in units 390,000 500,000 Cash revenue from each unit $1.20 $1.20 Annual costs Labor $130,000 $100,000 Depreciation (10% of asset book value or cost) Other cash operating costs $40,000 $71,000 $192,000 $80,000