Farrior Fashions needs to replace a beltloop attacher that currently costs the company $40,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $2,160. Managers have identified a potential replacement machine, Euromat's Model HD-435.
The HD-435 is priced at $48,720 and would cost Farrior Fashions $30,000 in annual cash operating costs. The machine has a useful life of 11 years, and it is not expected to have any salvage value at the end of that time.

a. Calculate the net present value of purchasing the HD-435, assuming Farrior Fashions uses a 14% discount rate.
b. Calculate the internal rate of return on the HD-435.
c. Calculate the payback period of the HD-435.
d. Calculate the accounting rate of return on the HD-435.
e. Should Farrior Fashions purchase the HD-435? Why or why not?

  • CreatedFebruary 21, 2014
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