7 Determining the internal rate of return LO 16-3

Merton Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the companys cash outflow for operating expenses by $1,290,000 per year. The cost of the equipment is $6,408,255.60. Merton expects it to have a 8-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

a.

Calculate the internal rate of return of the investment opportunity.

INTERNAL RATE OF RETURN ( )%

Return on investment 5 LO 15-6

Albany Company calculated its return on investment as 13 percent. Sales are now $275,000, and the amount of total operating assets is $457,000.

Required

a.

If expenses are reduced by $27,500 and sales remain unchanged, what return on investment will result?(Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

RETURN ON INVESTMENT ( ) %

b.

If both sales and expenses cannot be changed, what change in the amount of operating assets is required to achieve the same result? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.) OPERATING ASSETS MUST BY ( decreased or increased ) BY ( ) Asset replacement decision 8 LO 13-5 A machine purchased three years ago for $316,000 has a current book value using straight-line depreciation of $177,000; its operating expenses are $36,000 per year. A replacement machine would cost $239,000, have a useful life of ten years, and would require $10,000 per year in operating expenses. It has an expected salvage value of $71,000 after ten years. The current disposal value of the old machine is $81,000; if it is kept 10 more years, its residual value would be $16,000. Required Calculate the total costs in keeping the old machine and purchase a new machine. KEEP OLD MACHINE PURCHASE NEW MACHINE TOTAL COSTS ( ) ( )