Garrett Boone, Farish Enterprises' vice president of operations, needs to replace an automatic lathe on the production

Question:

Garrett Boone, Farish Enterprises' vice president of operations, needs to replace an automatic lathe on the production line. The model he is considering has a sales price of $285,000 and will last for 9 years. It will have no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $40,000 per year. He also believes the lathe will reduce energy costs by $25,000 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,305.

Required

a. Calculate the lathe's internal rate of return.

b. If Farish Enterprises uses a 15% hurdle rate, should Garrett purchase the lathe?

c. Without doing any calculations, what do you know about the lathe's net present value?

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... 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...