A firm is considering an investment in a new machine with a price of $15.6 milli

Question

A firm is considering an investment in a new machine with a price of $15.6 million to replace its existing machine. The current machine has a book value of $5.4 million and a market value of $4.1 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 $6.3 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 $250,000 in net working capital. The required return on the investment is 10 percent, and the tax rate is 39 percent.

  

   

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.)

  

NET NPV=$

NET IRR=%

Requirement 1:

Explanation / Answer

Requirement 1:

The NPV and IRR calculations are as shown below for the purchase of the new machine:

Requirement 2: If we purchase the old machine as it is already there.

The inital investment is considered as the difference between market value and book value of the old machine which is 5,400,000- 4,100,000 = 1,300,000

The NPV and IRR is calculated below:

Year 0 1 2 3 4 Sale of old machine 4100000 Purchase of new machine -15600000 Investment in WC -250000 Cost Savings 6300000 6300000 6300000 6300000 Depreciation (st. line) 3900000 3900000 3900000 3900000 Profit before tax 2400000 2400000 2400000 2400000 Tax at 39% 936000 936000 936000 936000 Prfoit after tax 1464000 1464000 1464000 1464000 Add depreciation 3900000 3900000 3900000 3900000 Return of WC 250000 Net cash flow -11750000 5364000 5364000 5364000 5614000 NPV $   5,423,911.62 IRR 29.78%

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