Samuel Manufacturing Inc.is evaluating new machinery in its factory.The machinery would replace existing equipment.The new machinery would cost $430,000, would last 6 years, and would have a salvage value of $36,000.The existing machinery currently has a net book value of $72,000 and could be sold for $65,000.If kept, the old machine would have a salvage value of $5,000 in 6 years time.The new machinery is expected to lower direct labour costs by $22,000 per year.The current variable overhead rate is 120% of direct labour.Other annual cost savings are projected to be $15,000.Due to the reduction in the production cycle time, working capital requirements will decrease by $8,000 during the life of the new machine.Ignore income taxes.Required:
a.Compute the net present value of replacing the existing equipment at a 12 percent required rate of return.
b.Compute the internal rate of return.
c.Comment on the efficacy of the use of internal rate of return versus net present value in making this decision.

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The Answer of Samuel Manufacturing Inc.is evaluating new machinery in its factory.The machinery would replace existing equipment.The new machinery would cost $430,000, would last 6 years, and would have a salvage value of $36,000.The existing machinery currently has a net book value of $72,000 and could be sold for $65,000.If kept, the old machine would have a salvage value of $5,000 in 6 years time.The new machinery is expected to lower direct labour costs by $22,000 per year.The current variable overhead rate is 120% of direct labour.Other annual cost savings are projected to be $15,000.Due to the reduction in the production cycle time, working capital requirements will decrease by $8,000 during the life of the new machine.Ignore income taxes.Required:
a.Compute the net present value of replacing the existing equipment at a 12 percent required rate of return.
b.Compute the internal rate of return.
c.Comment on the efficacy of the use of internal rate of return versus net present value in making this decision.