Problem 9-29

Grouper Fashions needs to replace a belt loop attacher that currently costs the company $45,000 in annual cash operating costs. This machine is of no use to another company, but it could be sold as scrap for $2,220. Managers have identified a potential replacement machine, Euromats Model HD-435. The HD-435 is priced at $47,547 and would cost Grouper Fashions $35,000 in annual cash operating costs. The machine has a useful life of 13 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 Grouper Fashions uses a 16% discount rate.

Net present value $_____________ (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)

(b) Calculate the internal rate of return on the HD-435.

Internal rate of return __________%

(c) Calculate the payback period of the HD-435.

Payback period _____________years (Round answer to 4 decimal places, e.g. 15.2515.)

(d) Calculate the accounting rate of return on the HD-435.

Accounting rate of return ________________% (Round answer to 2 decimal places, e.g. 11.25%.)

(e) Should Grouper Fashions purchase the HD-435?

___________(YES OR NO)