Crofton Inc

question 153

Essay

Crofton Inc.is evaluating new machinery in its foundry.The machinery would replace existing equipment.The new machinery would cost $230,000, would last 5 years, and would have a salvage value of $28,000.The existing machinery currently has a net book value of $52,000 and could be sold for $38,000.If kept, the old machine would have a salvage value of $6,000 in 5 years' time.The new machinery is expected to lower direct labour costs by $18,000 per year.The current variable overhead rate is 120% of direct labour.Other annual cost savings are projected to be $30,000.Due to the reduction in the production cycle time, working capital requirements will decrease by $25,000 during the life of the new machine.Ignore income taxes.Required:
a.Compute the net present value of replacing the existing equipment at a 9 percent required rate of return.
b.Compute the internal rate of return.

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Definitions:

Primary Decision Makers

Individuals or entities with the authority to make crucial decisions within a business, organization, or other group.

Objective

A goal or aim that is specific, measurable, achievable, relevant, and time-bound.

Indirect Approach

A communication or problem-solving strategy that avoids direct confrontation, often using suggestion or roundabout methods instead.

Main Idea

The central or most important point or theme of a text or conversation.