Question

The G.Rod Electronic Component is considering replacing a 10 year-old machine that originally cost $37,500, has a current book value of $12,500 with 5 years of expected life left, and is being depreciated using the simplified straight-line method over its 15-year expected life down to a terminal value of zero in 5 years, generating depreciation of $2,500 per year. The replacement machine being considered would cost $100,000 and have a 5-year expected life over which it would be depreciated using the simplified straight-line method down to zero. At termination in 5 years, the new machine would have a salvage value of $35,000. Material efficiencies resulting from the replacement would result in savings of $30,000 per year before depreciation and taxes. Currently, the old machine could be sold for $17,000. Assuming simplified straight-line depreciation, a 34 percent marginal tax rate, and a required rate of return of 20 percent, calculate:

a. The payback period

b. Accounting rate of return

c. The net present value

d. Profitability index

e. Internal rate of return

Answer 1