JB\'s Inc. needs to possibly replace a piece of equipment The new equipment will
ID: 2760171 • Letter: J
Question
JB's Inc. needs to possibly replace a piece of equipment The new equipment will cost $62,000 and will require an increase in inventory of $4000. The old machine is three years old and is depreciated with the following schedule, (.2,.32,.19,.12,.12,.05). The new machine is expected to cut costs by $28000 per year over its five year operating life. The new machine will also be depreciated with the above schedule. At the end of five years the existing machine will have a market value of 4000, it is currently worth 25000 and originally cost $75000. The new machine is expected to be worth $6000 at the end of 5 years. The companies cost of capital is 8%, should the project be accepted. Show the initial investment, terminal value, 5 cashflows and the IRR or NPV and tell me if I should accept or reject the projectExplanation / Answer
Initial investment = Cost of new machine + Incerese in working capital - proceeds from sale of old machinery
= $62000 + 4000 - 25000
= $41000
Present value of Terminal value at the end of 5 year for new machinery = 6000 x 1/(1+0.08)5
= 6000 x 0.681
= 4086
Present value of 5 years cah inflow = 28000 x{ 1/(1+0.08)1 + 1/(1+0.08)2 + 1/(1+0.08)3 + 1/(1+0.08)4 + 1/(1+0.08)5}
= $111795.881
NPV = PV of cash inflows + PV of terminal value - initial investment
= 111795.881 + 4086 - 41000
= 74881.881
In the absence of tax rate, tax effect is not been considered.
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