Seattle Pipe Management is evaluating a proposal to buy a new turning lathe to replace 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, Seattle Pipe will incur $40,000 to remove the current lathe and revamp service facilities. The current lathe has a book value of $800,000 and a remaining useful life of 10 years. Technical advancements have made this lathe outdated, so its current resale value is only $340,000. The following comparative manufacturing cost data is available:

Current Lathe New Lathe Annual Production in units 780,000 1,000,000 Cash revenue from each unit $1.20 $1.20 Annual Costs Labor $160,000 $100,000 Depreciation $80,000 $142,000 Other cash operating costs $192,000 $80,000

Management believes that if it does not replace the lathe now, the company will have to wait seven years before the replacement is justified. The company uses a 10% discount rate in evaluating capital projects and expects all capital project investments to recoup their costs within five years. Both lathes are expected to have a negligible salvage value at the end of ten years.

Determine the following amounts. 1. Net present value of the new lathe (ignore taxes). 2. Internal rate of return on the new lathe (ignore taxes). 3. Payback period for the new lathe (ignore taxes, round to one decimal point). 4. Accounting rate of return for the new lathe (ignore taxes, round to one decimal point). 5. Using the amounts calculated in the capital budgeting problem, should the company keep the old lathe or buy the new one? Use details and explain your ideas. 6. What else should the company consider when making the decision to purchase a new capital asset?