Reference no: EM132965372
Question - The management of ABC Company is considering of purchase a new equipment to replace an old one.
The following information is available:
Current Equipment New Equipment
Annual production in units 900,000 1,000,000
Price for each unit $1.2 $1.2
Annual costs; Direct materials and labor $250,000 $150,000
Depreciation $180,000 $250,000
Other cash operating costs $252,000 $80,000
The new equipment costs $2,000,000, and the current equipment has a cash value of$ 150,000. Both equipment can be used for another 8 years from now on and both equipment's has NO SALVAGE VALUE at the end of the time period.. The company uses 10% discount rate in evaluating capital projects, and the company accepts projects only less than five years in pay back periods. (Hint: Incremental analysis is critical for management decisions.)
Required -
a. Determine the net present value of the new equipment.
b. Determine the internal rate of return of the new equipment.
c. Determine the payback period of the new equipment.
d. Determine whether the company should keep the present equipment or purchase the new one. Discuss your conclusion.