Question - A corp is considering modernizing its production facility by investing in new equipment and selling the old equipment. The following information has been collected on this investment.
Old Equipment New Equipment
Cost $80,800 Cost $38,560
Accumulated depreciation $40,400 Estimated useful life 8 years
Remaining life 8 years Salvage value in 8 years $4,592
Current salvage value $10,600 Annual cash operating costs $29,600
Salvage value in 8 years $0
Annual cash operating costs $36,000
Depreciation is $10,100 per year for the old equipment. The straight-line depreciation method would be used for the new equipment over an eight-year period with salvage value $4,592.
a) Determine the cash payback period (Ignore income taxes). (Cash payback period in years)
b) Calculate the annual rate of return.
c) Calculate the net present value assuming a 18% rate of return (Ignore income taxes).
d) Should the company purchase the new equipment?