A firm is considering an investment in a new machine with a price of $16.7 million...

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A firm is considering an investment in a new machine with aprice of $16.7 million to replace its existing machine. The currentmachine has a book value of $6.4 million and a market value of $5.1million. 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 $6.8 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 $350,000 in net working capital. The required return on theinvestment is 10 percent and the tax rate is 25 percent. Thecompany uses straight-line depreciation.

What is the NPV of the decision to purchase a new machine?(Do not round intermediate calculations and enter youranswer 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 youranswer 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. 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 old machine?(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. )

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4.4 Ratings (630 Votes)

NPV IRR calculations for the new machine Formula Year n 0 1 2 3 4 Price of new machine Initial investment II 16700000 Cost savings Cs 6800000 6800000 6800000 6800000 II4 Depreciation D 4175000 4175000 4175000 4175000 Cs D Taxable income Ti 2625000 2625000 2625000 See Answer

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Transcribed Image Text

A firm is considering an investment in a new machine with aprice of $16.7 million to replace its existing machine. The currentmachine has a book value of $6.4 million and a market value of $5.1million. 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 $6.8 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 $350,000 in net working capital. The required return on theinvestment is 10 percent and the tax rate is 25 percent. Thecompany uses straight-line depreciation. What is the NPV of the decision to purchase a new machine?(Do not round intermediate calculations and enter youranswer 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 youranswer 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. 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 old machine?(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. )