Reference no: EM133527603

Case Study: The manager of Worldwide Labs is analyzing the purchase of a new clinical laboratory equipment. The machine would cost $150,000, including freight and installation. In addition, the equipment will require the replacement of several key parts at the end of the third year of operations. The estimated cost of this replacement is $10,000. The manager estimates that the new machine would reduce the lab's annual operating costs by $40,000. The machine has a 5-year useful life and a salvage value of $25,000. The Lab usually requests a 15% rate of return for this types of investments. According to the manager's preliminary cost-benefit analysis, if the equipment costs only $160,000 (i.e., initial investment plus maintenance at the end of year 3) and it will bring accumulated cash inflows of $ 225,000 (i.e., savings of $40,000 per year during the next five years plus the salvage value of $25,000), the investment should be immediately accepted. Required:

Question 1. Is the manager's analysis correct? Please explain.

Question 2. Use excel to compute the equipment's net present value (NPV) and internal rate of return (IRR).

Question 3. Based on the NPV and the IRR, would you recommend the manager to accept the project?

Question 4. Suppose the new equipment would reduce the company's annual operating costs, by $45,000 per year. Would your recommendation change under these conditions?