(NPV; PI; payback; IRR) Bill Ward Construction Company provides custom pav¬ ing of sidewalks and driveways for residential and commercial customers. One of the most labor-intensive aspects of the paving operation is the preparation and mixing of materials. Paul Wilson, corporate engineer, has learned of a new computerized technology to mix (and monitor mixing of) materials. According to information received by Mr. Wilson, the cost of the required equipment would be $840,000, and the equipment would have an expected life of 7 years. If purchased, the new equipment would replace manually operated equipment. Data relating to the old and new mixing equipment follow.

a. Assume that the cost of capital in this company is 12 percent, which is the rate to be used in a discounted cash flow analysis. Compute the net present value and profitability index of investing in the new machine. Ignore taxes. Should the machine be purchased? Why or why not?

b. Compute the payback period for the investment in the new machine. Ignore taxes.

c. Rounding to the nearest whole percentage, compute the internal rate of re¬ turn for the new technology investment.

Transcribed Image Text:

OLD TECHNOLOGY: Original cost new Present book value Annual cash operating costs Current market value Market value in 7 years $ 75,000 32,000 220,000 12,000 0 7 years Remaining useful life NEW TECHNOLOGY: Cost $840,000 Annual cash operating costs 40,000 Market value in 7 years 0 Useful life 7 years