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Connect Inc. is evaluating new machinery in its foundry. The new machinery would replace existing equipment. The new machinery would cost $ 2 3 0
Connect Inc. is evaluating new machinery in its foundry. The new machinery would replace existing equipment. The new machinery would cost $ would last five years, and would have a salvage value of $ The existing machinery currently has a net book value of $ and could be sold for $ If kept, the old machine would have a salvage value of $ in five years. The new machinery is expected to lower direct labour costs by $ per year. The current variable overhead rate is of direct labour. Other annual cost savings are projected to be $ Due to the reduction in the production cycle time, working capital requirements will decrease by $ during the life of the new machine. Ignore income taxes.
a Compute the net present value of replacing the existing equipment at a required rate of return.
b Compute the internal rate of return.
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