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The Taiheiyo Chemical Corp. is considering replacing a 5-year-old machine that originally cost $50,000, presently...

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Finance

The Taiheiyo Chemical Corp. is considering replacing a 5-year-old machine that originally cost $50,000, presently has a book value of $25,000, and could be sold for $60,000. This machine is currently being depreciated using the simplified straight-line method down to terminal value of zero over the next 5 years, generating depreciation of $5,000 per year. The replacement machine would cost $100,000 and have a 5-year expected life over which it would be depreciated down using the simplified straight-line method and have no salvage value at the end of 5 years. The new machine would produce savings before depreciation and taxes of $35,000 per year. Assuming a 34% marginal tax rate and required rate of return of 10%:

  1. The payback period
  2. The NPV
  3. The Profitability Index
  4. IRR (extra credit)

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