TM company is considering replacing its machine with a new model that sells for $40,000, the...

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TM company is considering replacing its machine with a new modelthat sells for $40,000, the cost of installation is $6,000. Networking capital needed would be $5500. The old machine has beenfully depreciated and has a $2500 salvage value. The new machinewill be depreciated as a 5-year MACRS asset. Revenues are expectedto increase $18,000 per year over the 5-year life of the newmachine. At the end of 5 years the new machine is expected to havea $1500 salvage value. What are the NPV, IRR for this project if TMhas a required rate of return of 14% and a marginal tax rate of35%? Operating costs are not expected to increase from the currentlevel of $8,000 per year. Discuss your recommendations to thecompany’s CEO about the replacement.

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Calculation of NPV and IRR of the project Year 0 1 2 3 4 5 Investment in Machine 46000 Increase in net working capital 5500 Sale of old machine 2500 Tax 35 on Gain on sale 875 Operating cash flow 14920 16852 14791 13555 13555 Recovery of net working capital 5500 After tax sale value See Answer

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TM company is considering replacing its machine with a new modelthat sells for $40,000, the cost of installation is $6,000. Networking capital needed would be $5500. The old machine has beenfully depreciated and has a $2500 salvage value. The new machinewill be depreciated as a 5-year MACRS asset. Revenues are expectedto increase $18,000 per year over the 5-year life of the newmachine. At the end of 5 years the new machine is expected to havea $1500 salvage value. What are the NPV, IRR for this project if TMhas a required rate of return of 14% and a marginal tax rate of35%? Operating costs are not expected to increase from the currentlevel of $8,000 per year. Discuss your recommendations to thecompany’s CEO about the replacement.