Talia’s Tutus is considering purchasing a new sewing machine. The old machine it has right now...

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Talia’s Tutus is considering purchasing a new sewing machine.The old machine it has right now was bought 2 years ago for$30,000, with an assume life of 6 years and an assume salvage valueof $5,000. The firm uses straight-line depreciation. The oldmachine can be sold today for $25,000. If the firm continues usingthe old machine, it will be salvaged at the end of its life. Thenew machine can be purchased today for $40,000. The new machinefalls in the MACRS 3-year class. With the new sewing machine, thefirm is expected to have an additional revenue of $15,000 everyyear. The variable cost is 40% of the revenue, and the fixed costis $3,000 each year. If the opportunity cost of capital is 12%,corporate tax rate is 35%, and capital gain tax is 15%, what arethe project’s NPV and IRR?

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existing machine book value Book value purchase priceFinal book valueremaining lifetotal lifefinal book value 300005000465000 216666666666667 Time line 0 1 2 3 4 Proceeds from sale of existing asset selling price 1 tax rate 16250 Tax shield on existing asset book value Book value See Answer

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Talia’s Tutus is considering purchasing a new sewing machine.The old machine it has right now was bought 2 years ago for$30,000, with an assume life of 6 years and an assume salvage valueof $5,000. The firm uses straight-line depreciation. The oldmachine can be sold today for $25,000. If the firm continues usingthe old machine, it will be salvaged at the end of its life. Thenew machine can be purchased today for $40,000. The new machinefalls in the MACRS 3-year class. With the new sewing machine, thefirm is expected to have an additional revenue of $15,000 everyyear. The variable cost is 40% of the revenue, and the fixed costis $3,000 each year. If the opportunity cost of capital is 12%,corporate tax rate is 35%, and capital gain tax is 15%, what arethe project’s NPV and IRR?