Garrett Boone, Ayayai 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 $395,900 and will last for 12 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 $42,500 per year. He also believes the lathe will reduce energy costs by $23,500 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,338.Click here to view the factor table.(a) Calculate the lathe’s internal rate of return. Internal rate of return $ % (b) If Ayayai Enterprises uses a 10% hurdle rate, should Garrett purchase the lathe? YesNo
Garrett Boone, Ayayai 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 $395,900 and will last for 12 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 $42,500 per year. He also believes the lathe will reduce energy costs by $23,500 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,338.Click here to view the factor table.(a) Calculate the lathe’s internal rate of return. Internal rate of return $ % (b) If Ayayai Enterprises uses a 10% hurdle rate, should Garrett purchase the lathe? YesNo
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
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Garrett Boone, Ayayai 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 $395,900 and will last for 12 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 $42,500 per year. He also believes the lathe will reduce energy costs by $23,500 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,338.
Click here to view the factor table.
(a) Calculate the lathe’s
| Internal rate of return | $
|
% |
(b) If Ayayai Enterprises uses a 10% hurdle rate, should Garrett purchase the lathe?
YesNo
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