Crofton Inc

question 126

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. Annual fixed 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 at a 9 percent required rate of return.
b. Compute the internal rate of return.

---

Definitions:

Free Membership

A scenario where individuals can join an organization or access services without having to pay any fees.

Individual Choice

The decisions made by an individual based on preferences and constraints in order to maximize utility or satisfaction.

Renewable Resources

Natural resources that can be replenished naturally over time, such as sunlight, wind, and biomass.

True Cost

The real cost of production, considering all direct and indirect expenses, as well as opportunity costs.