Question

A firm is considering an investment in a new machine with a price of $18.15 million to replace its existing machine. The current machine has a book value of $6.15 million and a market value of $4.65 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 $6.85 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 $265,000 in net working capital. The required return on the investment is 12 percent and the tax rate is 35 percent. What is the NPV of the decision to purchase a new machine? (Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 1,234,567.89.) NPV $ What is the IRR of the decision to purchase a new machine? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR % What is the NPV of the decision to purchase the old machine? (A negative answer should be indicated by a minus sign. Enter your answer in dollars, not millions of dollars. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 1,234,567.89.) NPV $ What is the IRR of the decision to purchase the old machine? (Do not round intermediate calculations. 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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563 EBT 569 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri 11 AA = = = pt Wrap Text General Ea Copy Fill Paste BI U D- DA 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 DB581 Fax - as CT cu v w x y z DA DB Do DD DE 9 562 YEAR ------- 1 2 3 564 INITIAL INVESTMENT -18150000 565 SAVINGS IN COSTS 6850000 6850000 6850000 6850000 566 LESS NEW DEPRECIATION (18150000/4] 4537500 4537500 4537500 4537500 567 2312500 2312500 2312500 2312500 568 LESS TAX 809375 809375 809375 809375 NET INCOME 1503125 1503125 1503125 1503125 570 ADD NEW DEPRECIATION 4537500 4537500 4537500 4537500 571 OPERATING CFAT -18150000 6040625 6040625 6040625 6040625 572 ADD SALVAGE VALUE 573 ADD TAX SAVING ON LOSS ON SALE 574 LESS NWC -265000 575 ADD RECAPTURE OF NWC 265000 576 TOTAL NET CASH FLOW -18415000 6040625 6040625 6040625 6305625 577 PV FACTOR @12% 1 0 .8929 0.7972 0.7118 0.6355 A*B PV OF CFAT -18415000 5393415.18 4815549.27 4299597.56 4007338.68 100900.69 579 NPV 580 ANS 1 NPV of new machine= 100900.69 581 ANS 2 IRR of new machines 12.26% [=IRR(CX576:DB576)] 582 I RRnpvbeta RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN II Rea ferences BOU 120% -_- ODER 9 * * O ENG 22-11-2019) 578 H

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General Ea Copy Fill Paste BI U D- DA Merge & Center - $ % , :.: Conditional Format Cell Format Painter Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing DB590 fix CS CT CU CV CW CX CY CZ DA DB D CDD DE 588 NOTE BOOK VALUE OF OLD MACHINE 6150000 589 MARKET VALUE OF OLD MACHINE 4650000 A 590 LOSS ON SALE 1500000 591 TAX CREDIT @35% 525000 B 592 AFTER TAX SALVAGE VALUE 5175000 A+B 593 594 IF WE KEEP OLD MACHINE 595 YEARS 2 3 4 596 INCOME 0 0 0 0 DEPRECIATION (6150000/4) 1537500 1537500 1537500 1537500 598 EBT -1537500 - 1537500 - 1537500 -1537500 599 TAX -538125 -538125 -538125 -538125 600 NET INCOME -999375 -999375 -999375 -999375 DEPRECIATION 1537500 1537500 1537500 1537500 602 OPERATING CFAT 538125 538125 538125 538125 603 AFTER TAX SALVAGE VALUE -5175000 604 TERMINAL CFAT -5175000 538125 538125 538125 538125 PV FACTOR @12% 0.8929 0.7972 0.7118 0.6355 606 PV OF CFAT -5175000 480468.75 428989.96 383026.75 341988.17 -3540526.38 607 ANS 3 NPV = -3540526.38 608 ANS 4 IRR = -27.74% (=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 WAITSTEIN IDI Rea ferences BO! 120% - ODER 19 * OENG 22-11-2019 597 601 605 I