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Builtrite is considering the replacement of an existing machine. The new machine would cost $1.2 million and require $150,000 in installation costs. The existing machine can be sold now for $185,000 b
Builtrite is considering the replacement of an existing machine. The new machine would cost $1.2 million and require $150,000 in installation costs. The existing machine can be sold now for $185,000 before taxes. It is two years old, cost $800,000 and has a book value of $384,000 according to the 5-year MACRS recovery period. It has a remaining useful life of 5 years. If kept for the next five years it would have a salvage value of $0. Over the new machine's five year life it would reduce operating costs by $350,000 a year. The new machine would also be depreciated using the 5-year MACRS recovery period. At the end of 5 years it is estimated that the new machine would have a salvage value of $200,000. The new machine would require an additional investment in inventory of $25,000. Builtrite has a 9% cost of capital and an overall marginal tax rate of 40%.Calculate the NPV and IRR for this machine and decide if the new machine should be purchased. MACRS Year Depreciation 1 20% 2 32% 3 19% 4 12% 5 12% 6 5%
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*** ** the old ******************************* cost -185000Tax ****** on loss 79600=(384000-185000)*40%Capital **************** ******* * * * - ************* *************************** 152000 ***** ***** 40000=800000*rate ** *************** ****** ** **** 60800 ***** 38400 16000 ***** Cash **** -105400 ***** ***** ***** ***** ***** Fac=1/(1+9%)^n ******* ******* 0841680 ******* ******* *********** **** ******* ***** 32321 ***** 11335 * 23687NPV ** *** new ************************ ** machine ******************** cost ****************************** ****** 25000Salvage ***** 200000Tax ** **** *********************************************** (outflow)/Inflow ******** * * * * 172000Annual ****** 350000 350000 350000 ****** ****************** ******************************* ****** ****** ****** ****** **************************** ** depreciationNet ****** ***** ****** ***** ****** ********* on ****** ***** -32800 ***** 75200 *********** ***** *** ***** ****** 56100 ****** 112800Add: ************ ****** ****** ****** ****** 162000Operating **** **** ****** ****** 312600 ****** ********** **** **** -1375000 ****** ****** 312600 ****** ********** Fac=1/(1+9%)^n 1000000 0917431 ******* ******* ******* *********** **** ******** ****** ****** ****** ****** ****** -34613IRR of *** *** *********** discount Free **** **** ** *** ******* with 8% ******** ********************* **** **** -1375000 ****** 382800 ****** ****** 446800Disc ************** ******* 0925926 ******* ******* ******* *********** **** -1375000 ****** ****** 248152 201986 ****** ***************************************** ******************** *** machine should *** installed ** ****** ********
