Solved: The management of Pittsburgh Pipe is evaluating a

proposal to

The management of Pittsburgh Pipe is evaluating a proposal to buy a new turning lathe as a
replacement for a less efficient piece of similar equipment that would then be sold. The new
lathe's cost, including delivery and installation, is $1,420,000. If the lathe is purchased,
Pittsburgh Pipe will incur $40,000 to remove the present equipment and revamp service
facilities. The present equipment has a book value of $800,000 and a remaining useful life of 10
years.
Technical advancements have made this equipment outdated, so its current resale value is only
$340,000.
The following comparative manufacturing cost tabulation is available:

Management believes that if it does not replace the equipment now, the company will have to
wait 7 years before the replacement is justified. The company uses a 10 percent discount or
hurdle rate in evaluating capital projects and expects all capital project investments to recoup
their costs within 5 years. Both pieces of equipment are expected to have a negligible salvage
value at the end of 10 years.
a. Determine the net present value of the new equipment. (Ignore taxes.)
b. Determine the internal rate of return on the new equipment. (Ignore taxes.)
c. Determine the payback period for the new equipment. (Ignore taxes.)
d. Determine the accounting rate of return for the new equipment. (Ignore taxes.)
e. Determine whether the company should keep the present equipment or purchase the new
lathe. Provide discussion of yourconclusion.

The management of Pittsburgh Pipe is evaluating a proposal to

ANSWER
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