The management of ABC Company is considering of purchase a new equipment to replace an old one.

The following infmmation is available:

Current Equipment New Equipment

Annual production in units 900,000 I ,000,000

Price for each unit $ 1.2 $ 1.2

Annual costs; Direct materials and labor $250,000 $150,000

Depreciation $180,000 $250,000

Other cash operating costs $252,000 $80,000

The new equipment costs $2,000,000, and the current equipment has a cash value of$ 150,000.Both equipment can be used for another 8 years from now on and both equipments has NO SALVAGE VALUE at the end of the time period..The company uses I 0% discount rate in evaluating capital projects, and the company accepts projects only less than five years in pay back periods. (Hint: Incremental analysis is critical for management decisions.)

Instructions: (Ignore income taxes)

a.Determine the net present value of the new equipment.(5 marks)

b.Determine the internal rate of return of the new equipment.(5 marks)

c.Determine the pay back period of the new equipment.(5 marks)

d. Determine whether the company should keep the present equipment or purchase the new one. Discuss your conclusion. (10 marks)