Suppose you are thinking to replace an old machine with a new one for your business. The old
machine cost you $100,000, and the new one costs $150,000. The new machine will be
depreciated on a three-year MACRS basis. The new machine has a 5-year life and a salvage
value of zero at the end of this period. The old machine was purchased 5 years ago, and it is being depreciated at the rate of $9,000 per
year. Its book value is $55,000, and its salvage value today is $65,000. You estimate that you
will be able to sell the old machine for $10,000 in 5 years, if you decide to not replace it.
The new machine will save you $50,000 per year. The tax rate is 40%, and the required rate of
return is 10%. Based on the NPV and IRR investment criteria, should you replace the old
machine? Should the cost of the old machine be included in your decision? Why or why
not? Calculate the Initial Investment of the project, and the Terminal Cash Flow of the
project.
This was the Excel format that we were given:
Year 1 Year 2 Year 3 Year 4 Year 5 Cost Savings $50,000 $50,000 $50,000 $50,000 $50,000 Depreciation New Depreciation Old $9,000 $9,000 $9,000 $9,000 $9,000 Increm EBIT Taxes NI Year Year 0 Year 1 Year 2 Year 3 Year 4 Year5 OCF NCS Change in NWC CCFA NPV IRR
Suppose you are thinking to replace an old machine with a new one for your business. The old
machine cost you $100,000, and the new one costs $150,000. The new machine will be
depreciated on a three-year MACRS basis. The new machine has a 5-year life and a salvage
value of zero at the end of this period. The old machine was purchased 5 years ago, and it is being depreciated at the rate of $9,000 per
year. Its book value is $55,000, and its salvage value today is $65,000. You estimate that you
will be able to sell the old machine for $10,000 in 5 years, if you decide to not replace it.
The new machine will save you $50,000 per year. The tax rate is 40%, and the required rate of
return is 10%. Based on the NPV and IRR investment criteria, should you replace the old
machine? Should the cost of the old machine be included in your decision? Why or why
not? Calculate the Initial Investment of the project, and the Terminal Cash Flow of the
project.
This was the Excel format that we were given:
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||
| Cost Savings | $50,000 | $50,000 | $50,000 | $50,000 | $50,000 | |
| Depreciation New | ||||||
| Depreciation Old | $9,000 | $9,000 | $9,000 | $9,000 | $9,000 | |
| Increm | ||||||
| EBIT | ||||||
| Taxes | ||||||
| NI | ||||||
| Year | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year5 |
| OCF | ||||||
| NCS | ||||||
| Change in NWC | ||||||
| CCFA | ||||||
| NPV | ||||||
| IRR | ||||||
