A firm is considering an investment in a new machine with aprice of $15.7 million to replace its existing machine. The currentmachine has a book value of $5.5 million and a market value of $4.2million. The new machine is expected to have a 4-year life, and theold machine has four years left in which it can be used. If thefirm replaces the old machine with the new machine, it expects tosave $6.35 million in operating costs each year over the next fouryears. Both machines will have no salvage value in four years. Ifthe firm purchases the new machine, it will also need an investmentof $260,000 in net working capital. The required return on theinvestment is 9 percent and the tax rate is 21 percent. The companyuses straight-line depreciation. What is the NPV of the decision topurchase a new machine? (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.) What is the IRR of the decision topurchase a new machine? (Do not round intermediate calculations andenter your answer as a percent rounded to 2 decimal places, e.g.,32.16.) What is the NPV of the decision to purchase the oldmachine? (A negative amount should be indicated by a minus sign. Donot round intermediate calculations and enter your answer indollars, not millions, rounded to 2 decimal places, e.g.,1,234,567.89.) What is the IRR of the decision to purchase the oldmachine? (A negative amount should be indicated by a minus sign. Donot round intermediate calculations and enter your answer as apercent rounded to 2 decimal places, e.g., 32.16. )
A firm is considering an investment in a new machine with aprice of $15.7 million to replace its existing machine. The currentmachine has a book value of $5.5 million and a market value of $4.2million. The new machine is expected to have a 4-year life, and theold machine has four years left in which it can be used. If thefirm replaces the old machine with the new machine, it expects tosave $6.35 million in operating costs each year over the next fouryears. Both machines will have no salvage value in four years. Ifthe firm purchases the new machine, it will also need an investmentof $260,000 in net working capital. The required return on theinvestment is 9 percent and the tax rate is 21 percent. The companyuses straight-line depreciation. What is the NPV of the decision topurchase a new machine? (Do not round intermediate calculations andenter your answer in dollars, not millions, rounded to 2 decimalplaces, e.g., 1,234,567.89.) What is the IRR of the decision topurchase a new machine? (Do not round intermediate calculations andenter your answer as a percent rounded to 2 decimal places, e.g.,32.16.) What is the NPV of the decision to purchase the oldmachine? (A negative amount should be indicated by a minus sign. Donot round intermediate calculations and enter your answer indollars, not millions, rounded to 2 decimal places, e.g.,1,234,567.89.) What is the IRR of the decision to purchase the oldmachine? (A negative amount should be indicated by a minus sign. Donot round intermediate calculations and enter your answer as apercent rounded to 2 decimal places, e.g., 32.16. )
Related questions
Calculating Payback. Global Toys Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?
| Year Cash Flow (A) Cash Flow (B) 0 â$55,000 â$ 95,000 1 19,000 18,000 2 27,000 26,000 3 24,000 28,000 4 9,000 260,000 |
Which Project should be accepted A or B?
a. The payback for Project A is: Payback =
b. The payback for Project B is: Payback =
c. Which project should be accepted:
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Calculating AAR. Youâre trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $14 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,253,000, $1,935,000, $1,738,000, and $1,310,000 over these four years, what is the projectâs average accounting return (AAR)?
Calculating AAR, the average net income divided by the average book value. (Show work by calculating net income and average book value):
a. Average net income =
b. Average book value =
c. AAR =
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Calculating IRR. A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project?
| Year Cash Flow 0 â$153,000 1 78,000 2 67,000 3 49,000 |
Calculating IRR the interest rate that makes the NPV of the project equal to zero. (Show work by calculating IRR):
a. IRR =
b. Should the project be accepted and why?
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Calculating NPV. For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent?
Calculating NPV. Hint the NPV of a project is the PV of the outflows minus by the PV of the inflows. (Show work by calculating NPV):
a. @ 9% required return.
NPV@ 9% required return =
b. Should the project be accepted:
c. @ 21% required return.
NPV@ 21% required return =
d. Should the project be accepted:
