MW Property Management (MW) owns and manages apartment buildings. Each apartment building has a dedicated room for laundry facilities. One of the laundry facilities was equipped with older laundry machines and driers that consume more electricity than the newer ones. These machines were purchased 10 years ago, and they can last for another 10 years. The management is considering replacing these old machines with new energy efficient machines. MW€™s accountant has gathered the following comparison for the annual expenses:

 

The cost of the old machines was $56,000, and the new machines will cost $40,000. If the new machines are purchased, the old machines can be sold for $3,000 now. Both sets of machines will be disposed of in 10 years, with no residual value then. MW€™s required rate of return is 6%. In general, MW rejects projects with a payback period greater than 4 years. 

Required:

A. What is the project€™s payback period?

B. What is the project€™s net present value?

C. What is the project€™s internal rate of return?

D. Suppose you are the manager for this specific building, and your performance appraisal for the current year is based on the accounting income. Would you recommend proceeding with this project to replace the machines?

E. Should MW proceed with this project? Please support your recommendation by providing quantitative and qualitative reasons.

Transcribed Image Text:

Annual Expenses Electricity Water Maintenance Depreciation New Machines Old Machines $20,000 6,000 4,200 2,800 $12,000 5,200 5,800 4,000