TubeFab Inc. is considering replacing its metal tubing machine acquired 2 years ago at a cost of $50,000. This machine is still in good condition but management wants more flexibility and lower manufacturing costs. The actual current market value of the machine is $20,500, with a of $2,000 in 10 years.
A manufacturer is offering a new metal tubing machine at a price of $60,000. The machine would last 10 years and has an expected of $4,000. The new machine will require an additional $5,000 in working capital, which will be recovered at the end of the 10th year. With the new machine, management estimates an important decrease in the manufacturing costs:
TubeFab has a minimum desired rate of return of 8% and a cutoff period of 4 years in evaluating the new project.
REQUIRED
A. What is the of this machine?
B. Calculate the point of indifference in terms of annual cost savings (or cash flow).
C. What is the payback period?
D. What is the accrual accounting rate of return (AARR)?
E. Based on your calculations above, state your conclusion on whether the new tubing machine should be purchased. Please briefly comment on quantitative measures and qualitative issues?
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