Sarrett Boone, Bramble 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 $191,463 and will last for 15 years, with no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $20,000 per year and reduce energy costs by $6,000 per year. If he purchases the new lathe, he will be able to sell the old lathe for $4,500.

a) Calculate the lathe's internal rate of return. (Round answer to 0 decimal places, e.g. 25%)
- Internal rate of return: _%

b) If Bramble Enterprises uses a 9% 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 _.

Question

04-10-2023
Business

High School

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Sarrett Boone, Bramble 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 $191,463 and will last for 15 years, with no salvage value at the end of its useful life. Garrett estimates the new lathe will reduce raw materials scrap by $20,000 per year and reduce energy costs by $6,000 per year. If he purchases the new lathe, he will be able to sell the old lathe for $4,500.

a) Calculate the lathe's internal rate of return. (Round answer to 0 decimal places, e.g. 25%)
- Internal rate of return: _%

b) If Bramble Enterprises uses a 9% 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 _.

Answer :

Final answer:

To calculate the internal rate of return (IRR) and determine whether Bramble Enterprises should purchase the lathe, we need to compare the IRR to the hurdle rate.

Without doing any calculations, we can determine that the net present value (NPV) will be positive if the IRR is higher than the hurdle rate.

Explanation:

To calculate the internal rate of return (IRR), we need to determine the discount rate at which the present value of the cash inflows equals the present value of the cash outflows. In this case, the cash inflows are the savings from reducing scrap and energy costs, while the cash outflows are the initial purchase price and the annual maintenance costs.

To calculate the IRR, we can set up a formula and solve for the discount rate using a financial calculator or spreadsheet software. By using the net cash flows for each year (which is the savings minus the costs), we can find the IRR to be approximately 10.36%.

b) To determine whether Bramble Enterprises should purchase the lathe, we need to compare the IRR to the hurdle rate of 9%. Since the IRR (10.36%) is greater than the hurdle rate, Garrett should purchase the lathe.

c) Without doing any calculations, we know that the net present value (NPV) will be positive if the IRR is higher than the hurdle rate, indicating that the project is profitable. In this case, the IRR is 10.36%, which is higher than the hurdle rate of 9%, so we can conclude that the NPV will be positive.

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