lhe following information pertains to a proposcd replaccmcnt projcct with a fivc
ID: 2807687 • Letter: L
Question
lhe following information pertains to a proposcd replaccmcnt projcct with a fivc-ycar life S125.000.00 $60,0OO.00 $40,000.00 Proposed investment in new machine Installcd cost of old machinc (purchascd 4 ycars ago) Estimated market value of old machine(today) Original depreciable lise ol oldd machine Estimated deprcciable life of new machinc Depreciation method for old machine Deprecialion melhod for new machine Annual maintcnancc cost of old machinc Estimated annual maintenance cost of new machine Projectedd annual labour savings lrom new machine Corporate tax rate Coporate cost of capital years 5 ycars straight line, 7ero SV straighl line, zero SV $25,0OO.00 15,000.00 $20,000.00 34% 12% Other infornmation available Old New S3.500.00 $9,000.00 $10,000.00 S5.000.00 $8.000.00 $10,000.00 S4.500O.0O $12,0OO.00 $13.500.00 S8,000.00 $10,500.00 $12,500.00 Accruals Accounts Pavable Accounts Receivable ash Inventory Noles Payable:s What are the project's NPV and TRR? Should you accept the replacement?Explanation / Answer
Statement showing WC requirement
Thus 2500$ will be required more
Statement showing book value of old machine
Statement showing cash inflow from sale of old machine
Step 1) Initial investment = purchase cost of new machine + WC requirement - Selling price of old machine
=125000+2500-36600
=90900$
Step 2) Depreciation = 125000/5 =25000
Step 3) statement showing NPV
IRR is rate at which NPV is 0
At 17.3695% NPV is 0. hence IRR = 17.3695%
Particulars old new Increase/decrease Increase / decrease in cash Accruals 3500 4500 1000 1000 Account payable 9000 12000 3000 3000 account receivable 10000 13500 3500 -3500 cash 5000 8000 3000 -3000 Inventory 8000 10500 2500 -2500 notes payable 10000 12500 2500 2500 -2500Related Questions
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