P13.29A (LO 1, 2, 5) Magenta Inc. 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: Cost Old Equipment Accumulated depreciation Remaining life Current salvage value Salvage value in 8 years New Equipment $80,000 Cost $38,000 $40,000 Estimated useful life 8 years $ 5,000 8 years Salvage value in 8 years $10,000 Annual cash operating costs $30,000 $ Annual cash operating costs $36,000 Depreciation is $10,000 per year for the old equipment. The straight-line depreciation method would be used for the new equipment over an eight-year period with a salvage value of $5,000. Instructions a. Determine the cash payback period. (Ignore income taxes.) b. Calculate the annual rate of return. b. 8.72% c. Calculate the net present value assuming a 16% rate of return. (Ignore income taxes.) d. State your conclusion on whether the company should purchase the new equipment. Calculate the payback period, annual rate of return, and net present value.
P13.29A (LO 1, 2, 5) Magenta Inc. 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: Cost Old Equipment Accumulated depreciation Remaining life Current salvage value Salvage value in 8 years New Equipment $80,000 Cost $38,000 $40,000 Estimated useful life 8 years $ 5,000 8 years Salvage value in 8 years $10,000 Annual cash operating costs $30,000 $ Annual cash operating costs $36,000 Depreciation is $10,000 per year for the old equipment. The straight-line depreciation method would be used for the new equipment over an eight-year period with a salvage value of $5,000. Instructions a. Determine the cash payback period. (Ignore income taxes.) b. Calculate the annual rate of return. b. 8.72% c. Calculate the net present value assuming a 16% rate of return. (Ignore income taxes.) d. State your conclusion on whether the company should purchase the new equipment. Calculate the payback period, annual rate of return, and net present value.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:P13.29A (LO 1, 2, 5) Magenta Inc. 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:
Cost
Old Equipment
Accumulated depreciation
Remaining life
Current salvage value
Salvage value in 8 years
New Equipment
$80,000 Cost
$38,000
$40,000 Estimated useful life
8 years
$ 5,000
8 years Salvage value in 8 years
$10,000 Annual cash operating costs $30,000
$
Annual cash operating costs $36,000
Depreciation is $10,000 per year for the old equipment. The straight-line depreciation method would be used for the new equipment over an eight-year period with a salvage value of $5,000.
Instructions
a. Determine the cash payback period. (Ignore income taxes.)
b. Calculate the annual rate of return.
b. 8.72%
c. Calculate the net present value assuming a 16% rate of return. (Ignore income taxes.)
d. State your conclusion on whether the company should purchase the new equipment.
Calculate the payback period, annual rate of return, and net present value.
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