Question

A firm is considering an investment in a new machine with a price of $18.13 million to replace its existing machine. The current machine has a book value of $6.13 million and a market value of $4.63 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 $6.83 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 $263,000 in net working capital. The required return on the investment is 10 percent, and the tax rate is 34 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, e.g., 1,234,567.)

  

NPV

$

  

What is the IRR of the decision to purchase a new machine? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

IRR

%

  

What is the NPV of the decision to keep 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, e.g., 1,234,567. A negative answer should be indicated by a minus sign.)

  

NPV

$

  

What is the IRR of the decision to keep the old machine? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. A negative answer should be indicated by a minus sign.)

  

IRR

%

Answer 1

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- 2x Σ AutoSum : A Fill 2 Sort & Clear Filter Editing m Find & Select DB DC DD G 563 4 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11 A A = = = V Wrap Text General Ea Copy Paste B I U. . A E Format Painter E Merge & Center - Merge & Center - $ $ -% % ; 8 ... Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells CR576 @ foc I CR CS CT cu v w x y z DA 562 YEAR ------- 1 2 3 564 INITIAL INVESTMENT -18130000 565 SAVINGS IN COSTS 6830000 6830000 6830000 566 LESS NEW DEPRECIATION (18130000/4] 4532500 4532500 4532500 567 EBT 22975002297500 568 LESS TAX 781150 781150 781150 569 NET INCOME 1516350 1516350 1516350 570 ADD NEW DEPRECIATION 4532500 4532500 4532500 571 OPERATING CFAT -18130000 6048850 6048850 6048850 572 ADD SALVAGE VALUE 573 ADD TAX SAVING ON LOSS ON SALE 574 LESS NWC -263000 575 ADD RECAPTURE OF NWC 576 A TOTAL NET CASH FLOW -18393000 6048850 6048850 6048850 577 PV FACTOR @10% 1 0.9091 0.8264 0.7513 578 A*B PV OF CFAT -18393000 5498954.55 4999049.59 4544590.53 6830000 4532500 2297500 781150 1516350 4532500 6048850 263000 6311850 0.6830 4311078.48 B 960673.14 NPV 579 580 581 582 ANS 1 ANS 2 NPV of new machines IRR of new machine= 960673.14 12.38% (=IRR(CX576:DB576)] H RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND STIL O I RRnpvbeta ferences OPTION TO WAIT 20J 120% Rea + SPOR 9 * > ENG 06-11-2019

- 2x DD G 588 592 4 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General Ea Copy Fill Paste BIU - D A SF Merge Merge & Center - Center $ % % , 4:0 .00 :.: Conditional Format Cell Format Painter Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing CZ588 fax CR CS CT CU CV CW cx cy z DA DB DC NOTE BOOK VALUE OF OLD MACHINE 6130000 589 MARKET VALUE OF OLD MACHINE 4630000 A 590 LOSS ON SALE 1500000 591 TAX CREDIT @34% 510000 B AFTER TAX SALVAGE VALUE 5140000 A+B 593 594 IF WE KEEP OLD MACHINE 595 YEARS 2 3 596 INCOME 0 0 0 0 597 DEPRECIATION (6130000/4) 1532500 1532500 1532500 1532500 598 EBT -1532500 -1532500 -1532500 -1532500 599 TAX -521050 -521050 -521050 -521050 600 NET INCOME -1011450 -1011450 -1011450 -1011450 DEPRECIATION 1532500 1532500 1532500 1532500 602 OPERATING CFAT 521050 521050 521050 521050 603 AFTER TAX SALVAGE VALUE -5140000 604 TERMINAL CFAT -5140000 521050 521050 521050 521050 605 PV FACTOR AT 10% 0.9091 0.8264 0.7513 0.6830 606 PV OF CFAT -5140000 473681.82 430619.83 391472.58 355884.16 -3488341.61 607 ANS 3 NPV = -3488341.61 608 ANS 4 IRR = -28.37% (=IRR(CX604:DB604)] N IRRnpvbeta RATION PBP ARR invest, EAA MI-np-ir REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTOI Rea ferences BOU 120% DOR . * 4 OENG 601 I 1 + 06-11-2019