A firm is considering an investment in a new machine with a price of $18.02 million...

90.2K

Verified Solution

Question

Finance

A firm is considering an investment in a new machine with aprice of $18.02 million to replace its existing machine. Thecurrent machine has a book value of $6.02 million and a marketvalue of $4.52 million. The new machine is expected to have afour-year life, and the old machine has four years left in which itcan be used. If the firm replaces the old machine with the newmachine, it expects to save $6.72 million in operating costs eachyear over the next four years. Both machines will have no salvagevalue in four years. If the firm purchases the new machine, it willalso need an investment of $252,000 in net working capital. Therequired return on the investment is 10 percent and the tax rate is35 percent. What is the NPV of the decision to purchase a newmachine?

Answer & Explanation Solved by verified expert

4.1 Ratings (784 Votes)

Calculation of NPV of the decision to purchase a new machine Year 0 1 2 3 4 Investment in a new machine 1802000000 After tax Market value of current Machine 504500000 Investment in net working capital 25200000 Savings in operating cost 672000000 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

A firm is considering an investment in a new machine with aprice of $18.02 million to replace its existing machine. Thecurrent machine has a book value of $6.02 million and a marketvalue of $4.52 million. The new machine is expected to have afour-year life, and the old machine has four years left in which itcan be used. If the firm replaces the old machine with the newmachine, it expects to save $6.72 million in operating costs eachyear over the next four years. Both machines will have no salvagevalue in four years. If the firm purchases the new machine, it willalso need an investment of $252,000 in net working capital. Therequired return on the investment is 10 percent and the tax rate is35 percent. What is the NPV of the decision to purchase a newmachine?