A firm is considering an investment in a new machine with a price of $18.04 mill
ID: 2741124 • Letter: A
Question
A firm is considering an investment in a new machine with a price of $18.04 million to replace its existing machine. The current machine has a book value of $6.04 million and a market value of $4.54 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.74 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $254,000 in net working capital. The required return on the investment is 9 percent, and the tax rate is 38 percent. Assume the company uses straight-line depreciation.
What is the NPV of the decision to purchase a new machine? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16). Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is the IRR of the decision to purchase a new machine? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
What is the NPV of the decision to purchase the old machine? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16). Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Negative amount should be indicated by a minus sign.)
What is the IRR of the decision to purchase the old machine? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16). Negative amount should be indicated by a minus sign.)
IRR
Please don't use spreadsheet method if possible-thank you!
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A firm is considering an investment in a new machine with a price of $18.04 million to replace its existing machine. The current machine has a book value of $6.04 million and a market value of $4.54 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.74 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $254,000 in net working capital. The required return on the investment is 9 percent, and the tax rate is 38 percent. Assume the company uses straight-line depreciation.
Explanation / Answer
Requirement 1:
a & B) Calculation of NPV & IRR for New Machinery:
Requirement 2:
a & B) Calculation of NPV & IRR for OLD Machinery:
Year CF Depreciation Net cash flow CFAT(62%) Cash flow for NPV PVF @9% PV 1 6.74 4.51 2.23 1.3826 5.8926 0.917 5.40 2 6.74 4.51 2.23 1.3826 5.8926 0.842 4.96 3 6.74 4.51 2.23 1.3826 5.8926 0.772 4.55 4 6.74 4.51 2.23 1.3826 5.8926 0.708 4.17 TOTAL 19.09 Initial Investment 18.04 WC investment 0.25 NPV 1.30 IRR (Using excel) 0.018 or 1.8%Related Questions
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