Determining NPV

Lombard Company Limited (LCL) is contemplating the purchase high-speed grinder to replace the existing grinder. The existing grinder was purchased 2 years back at an installed cost of $60,000. The existing grinder can be used for another 5 years. The existing grinder can be sold for $70,000 removal and clean up costs will total $42,000.

The new grinder costs $105,000 and requires $5,000 to install and has a life of 5 years. To support the increased business resulting from the purchase of a new grinder, the controller for LCL gathered the following information:

Accounts receivable would increase by $40,000.

Inventories would increase by 30,000

Accounts payable by 58,000

Salvage value of existing grinder 0

New grinder - net value29,000

CCA rate for class 8 Asset20%

Tax rate for LCL40%

Cost of Capital for LCL12%

The estimated operating income for both grinders are shown below:

YearOperating Income before taxes

New GrinderExisting Grinder

1$43,000$26,000

243,00024,000

343,00022,000

443,00020,000

543,00018,000

Required:

a.Should LCL go with the purchase of new grinder?

b.Determine the approximate Internal Rate of Return for this proposal.