X Company is considering the replacement of an existing machine. The new machine costs $1.8 million...

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X Company is considering the replacement of an existing machine.The new machine costs $1.8 million and requires installation costsof $250,000. The existing machine can be sold currently for$125,000 before taxes. The existing machine is 3 years old, cost $1million when purchased, and has a $290,000 book value and aremaining useful life of 5 years. It was being depreciated underMACRS using a 5-year recovery period. If it is held for 5 moreyears, the machine’s market value at the end of year 5 will bezero. Over its 5-year life, the new machine should reduce operatingcosts by $650,000 per year, and will be depreciated under MACRSusing a 5-year recovery period. The new machine can be sold for$150,000 net of removal and cleanup costs at the end of 5 years. A$30,000 increase in net working capital will be required to supportoperations if the new machine is acquired. The firm has adequateoperations against which to deduct any losses experienced on thesale of the existing machine. The firm has a 15% cost of capital,is subject to a 40% tax rate and requires a 42-month payback periodfor major capital projects.
5-Year MACRS
Year 120%
Year 232%
Year 319%
Year 412%
Year 512%
Year 65%
1. Should they accept or reject the proposal to replace themachine?
2. What is the NPV?
3. What is the IRR?
4. What is the payback period?

Answer & Explanation Solved by verified expert

4.0 Ratings (609 Votes)

Let us calculate the NPV IRR and Pay back period accordingly we can decide whether to go for the project or no Initial Investment OutlayCost of the Machine Installation Cost Working Capital Requirements Salvage value of the old machine Tax Salvage of Old Machine Book value of Old Machine Therefore Initial investment outlay 1800000 250000 30000 125000 04125000 290000 1889000 See Answer

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Transcribed Image Text

X Company is considering the replacement of an existing machine.The new machine costs $1.8 million and requires installation costsof $250,000. The existing machine can be sold currently for$125,000 before taxes. The existing machine is 3 years old, cost $1million when purchased, and has a $290,000 book value and aremaining useful life of 5 years. It was being depreciated underMACRS using a 5-year recovery period. If it is held for 5 moreyears, the machine’s market value at the end of year 5 will bezero. Over its 5-year life, the new machine should reduce operatingcosts by $650,000 per year, and will be depreciated under MACRSusing a 5-year recovery period. The new machine can be sold for$150,000 net of removal and cleanup costs at the end of 5 years. A$30,000 increase in net working capital will be required to supportoperations if the new machine is acquired. The firm has adequateoperations against which to deduct any losses experienced on thesale of the existing machine. The firm has a 15% cost of capital,is subject to a 40% tax rate and requires a 42-month payback periodfor major capital projects.5-Year MACRSYear 120%Year 232%Year 319%Year 412%Year 512%Year 65%1. Should they accept or reject the proposal to replace themachine?2. What is the NPV?3. What is the IRR?4. What is the payback period?