Reference no: EM132549890

Question - The Magnificent Mines is considering replacing its excavation equipment. The new equipment will cost $520,000 to purchase and a further $130,000 to install. It is estimated that the new machine will generate annual cost savings of $170,000 over the next six years, and annual maintenance costs of $40,000 will be incurred.

At the end of four years, the machine will undergo maintenance and repairs at a cost of $90,000 and at the end of six years it will be sold for $200,000.

If the new equipment is purchased, the old equipment will be sold immediately for $32,400. The company has a required rate of return of 8% per annum.

Required -

a) Calculate the net present value of the new equipment.

b) Ascertain the internal rate of return of the new equipment (round-up to 1 decimal point). (7 marks)

c) Calculate the discounted payback period of the new product to be launched.

d) Based on your answers in (a), (b) and (c), should the management replace the old equipment with the new equipment? What other factors should be considered before the finalising its decision?