Lugar Industries is considering an investment in a new machine with the followin
ID: 2618884 • Letter: L
Question
Lugar Industries is considering an investment in a new machine with the following information:
Use this information for the next 3 questions:
Machine cost 250,000
Salvage value 50,000
Life 5 years
Working Capital $0 (no working capital needed) Net operating expense savings:
End of Year 1 $ 50,000
End of Year 2 $ 90,000
End of Year 3 $110,000
End of Year 4 $120,000
End of Year 5 $120,000
WACC 10%
Tax rate 40%
Assumed salvage value of the machine at end of 5 years is $50,000 (You will sell this machine at the end of the project for $50,000)
If Lugar buys the machine, calculate the following answers. Remember to include the impact of depreciation, taxes, and salvage value.
Based on the information, the NPV of this project would be: (Round you answer to the nearest two decimal places.
Based on the above information, calculate the IRR.
Based on your calculations, should Lugar buy the machine?
Explanation / Answer
Detail of depreciation is not mentioned. I assumed straight line method.
To compute NPV and IRR in excel, use respective function NPV and IRR of excel.
0 1 2 3 4 5 Machine cost -250,000 A Book Value 200,000 150,000 100,000 50,000 0 Salvage value 50,000 After-tax SV = SV-(BV-SV)*Tax 30,000 B Depreciation 50,000 50,000 50,000 50,000 50,000 Tax saving on depreciation 20,000 20,000 20,000 20,000 20,000 C Saving 50,000 90,000 110,000 120,000 120,000 D Cash Flow -250,000 70,000 110,000 130,000 140,000 170,000 NPV @ 10% 203,394.89 IRR 34.06%Related Questions
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