Question

A firm is considering an investment in a new machine with a price of $16.4 million to replace its existing machine. The current machine has a book value of $6.1 million and a market value of $4.8 million. The new machine is expected to have a 4-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 $6.65 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 $320,000 in net working capital. The required return on the investment is 11 percent and the tax rate is 22 percent. The company uses straight-line depreciation. What is the NPV of the decision to purchase a new machine? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) 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.) What is the NPV of the decision to purchase the old machine? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) What is the IRR of the decision to purchase the old machine? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. )

Answer 1

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Home nert Page Layout Formulas Data Review View dd-Ins Σ AutoSum ー E " ゴWrap Text в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 C Conditional Format CeInsert Delete Format Formatting, as Table w styles. ▼ ㆆ ▼ Sort &Find & 2 ClearFe Select Edting Format Painter Clipboard CS CT CU CV сх CY CZ DA DC INITIAL INVESTMENT 16400000 6650000 665 10000041 SAVINGS IN COSTS 6650000 4100000 0000 4100000 6650000 4100000 LESS NEW DEPRECIATION (16400000/4) EBT TAX NET INCOME NEW DEPRECIATION 2550000 561000 1989000 4100000 2550000 2550000 561000 1989000 4100000 2550000 561000 1989000 4100000 94 LESS 561000 1989000 10000041 ADD 089000 6089000 OPERATING CFAT SALVAGE VALUE TAX SAVING ON LOSS ON SALE NWC RECAPTURE OF NWC TOTAL NET CASH FLOWw PV FACTOR @ 11% PV OF CFAT 16400000 6089000 6089000 ADD ADD LESS ADD 100 101 102 103 104 105 106 107 108 11 -1 IRRmpv RATION PBP ARR ( external rate MIRR NPV 1RR REPLACEMENT S - HPR GMAM EAC MACRS LEASE RA 320000 320000 16720000 6089000 0.8116 6089000 0.7312 0.9009 0.6587 16720000 5485585.59 4941969.00 4452224.32 4221806.81 2381585.72 NPV ANS 1 NPV of new machine:- ANS 2 IRR of new machine: 2381585.72 17.46% EXCEL IRR(CX103:DB103) wacc BOND EPS EBIT REPLACEMENT STats 22-01-2019

Home nert Page Layout Formulas Data Review View dd-Ins E AutoSum Wrap Text в 1 프 . Ej-., Δ. : rーー 逻锂函Merge & Center. $, % , 弼,8 C Conditional Format CeInsert Delete Format Formatting as Table Styles2 Clear Sort &Find & Format Painter Clipboard DB133 CS Edting Formula Bar CT NOTE CU CV CX 6100000 4800000 1300000 CY CZ DC 114 115 116 BOOK VALUE OF OLD MACHINE MARKET VALUE OF OLD MACHINE LOSS ON SALE TAX CREDIT @22% AFTER TAX SALVAGE VALUE 286000 5086000 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 HMIRRnpy RATION PBP ARR extemal rate MIRR NPV IRRREPLACEMENT S HPR GMAM EAC MACRS IF WE KEEP OLD MACHINE YEARS INCOME DEPRECIATION EBT TAX NET INCOME DEPRECIATION OPERATING CFAT AFTER TAX SALVAGE VALUE TERMINAL CFAT PV FACTOR AT 11% PV OF CFAT 0 1525000 1525000 335500 1189500 1525000 335500 525000 1525000 525000 1525000 335500 1189500 525000 1525000 335500 1525000 1525000 335500 1189500 1525000 335500 335500 1189500 335500 335500 5086000 5086000 335500 0.9009 335500 0.7312 335500 0.6587 0.8116 5086000 302252.25 272299.33245314.71 221004.24-4045129.47 ANS 3 NPV : ANS 4 IRR 4045129.47 37.98% RATIOCASHBUDGET , wacc BOND EPS EBIT REPLACEMENT STats 10:50 22-01-2019