Zebra micro-devices, Inc. is considering an investment in new equipment that will cost $120,000 and is estimated to provide the following annual savings over its 5-year life:
a) Should the company acquire the new equipment if it can earn a return of 12% on its investments?
b) Should the company acquire the new equipment if it can earn a return of 9% on its investments?
c) Use the principal of value additivity to calculate the present value of the savings.
d) What is the implied annual rate of return is associated with the new equipment?
a) With a 12% required return, the company should not accept the investment as the value is less than the cost.
b) With a 9% required return, the company should accept the investment as the value is greater than the cost.
c) See calculations
d) The compound average annual rate of return (i.e., the IRR) is 10.39%. This indicates that at any required return of 10.39%, or less, the investment should be accepted.
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