Exercise 912 Garrett Boone Sarasota Enterprises vice preside

Exercise 9-12 Garrett Boone, Sarasota Enterprises\' vice president of operations, needs to replace an automatic lathe on the production line. The model he is considering has a sales price of $290,300 and will last for 8 years. It will have no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $41,300 per year. He also believes the lathe will reduce energy costs by $24,500 per year. If he purchases the new lathe, he will be able to sell the old lathe for $4,491 (a) Calculate the lathe\'s internal rate of return. Internal rate of return $ (b) If Sarasota Enterprises uses a 14% hurdle rate, should Garrett purchase the lathe? Yes No ou would like to Show Work for this question: Qpen Show Work

Solution

Exercise 9-12 Annual savings in energy cost 24500.00 Add: Reduction in raw material scrap 41300.00 Annual Inflows 65800.00 Annuity factor at 16% fr 8 periods 4.34 Present value of inflows 285802.30 Less: Net initial Investment 285509.00 (290000 -4491) NPV 293.30 Hence, IRR is 16% approx Yes , the project must be accepted