(Comprehensive; Appendix 2) 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 Technical advancements have made this equipment outdated, so its current resale value is only $340,000.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:

Â	Current Equipment	New Equipment
Annual production in units	780,000	1,000,000
Cash revenue from each unit	$1.20	$1.20
Annual costs	Â	Â
Labor	$160,000	$100,000
Depreciation (10% of asset book value or cost)	$80,000	$142,000
Other cash operating costs	$192,000	$80,000

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 your conclusion.