The management of Pittsburgh Pipe is evaluating a proposal to buy a new turning lathe as a

Question:

The management of Pittsburgh Pipe is evaluating a proposal to buy a new turning lathe as a replacement for a less efficient piece of similar equipment that would then be sold. The new lathe's cost, including delivery and installation, is $1,420,000. If the lathe is purchased, Pittsburgh Pipe will incur $40,000 to remove the present equipment and revamp service facilities. The present equipment has a book value of $800,000 and a remaining useful life of 10 years.

Technical advancements have made this equipment outdated, so its current resale value is only $340,000.

The following comparative manufacturing cost tabulation is available:

The management of Pittsburgh Pipe is evaluating a proposal to

Management believes that if it does not replace the equipment now, the company will have to wait 7 years before the replacement is justified. The company uses a 10 percent discount or hurdle rate in evaluating capital projects and expects all capital project investments to recoup their costs within 5 years. Both pieces of equipment are expected to have a negligible salvage value at the end of 10 years.
a. Determine the net present value of the new equipment. (Ignore taxes.)
b. Determine the internal rate of return on the new equipment. (Ignore taxes.)
c. Determine the payback period for the new equipment. (Ignore taxes.)
d. Determine the accounting rate of return for the new equipment. (Ignore taxes.)
e. Determine whether the company should keep the present equipment or purchase the new lathe. Provide discussion of yourconclusion.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...