Answered: Garrett Boone, Bridgeport Enterprises'…

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 1R

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Question

Garrett Boone, Bridgeport 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 $233,282 and will last for 15 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 $24,000 per year. He also believes the lathe will reduce energy costs by $6,000 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,100.

Click here to view the factor table.

(a) Calculate the lathe’s internal rate of return. (Round answer to 0 decimal places, e.g. 25%.)

Internal rate of return

enter the internal rate of return in percentages rounded to 0 decimal places

Garrett Boone, Bridgeport 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 $233,282 and will last for 15 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 $24,000 per year. He also believes the lathe will reduce
energy costs by $6,000 per year. If he purchases the new lathe, he will be able to sell the old lathe for $5,100.
Click here to view the factor table.
(a) Calculate the lathe's internal rate of return. (Round answer to O decimal places, eg. 25%.)
Internal rate of return
%
(b) If Bridgeport Enterprises uses a 8% hurdle rate, should Garrett purchase the lathe?
(c) Without doing any calculations, what do you know about the lathe's net present value?
Net present value will be v
less than $0
greater than $0
equal to $0
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