Question

YEAR MACRS 3-YEAR

1	33%
2	45%
3	15%
4	7%

Troll Inc is considering replacing an old, relatively inefficient Troll onjection-mold machine that was purchased three years ago with a new, more effiecent model. The cost of the old machine has $7500 and had an expected MACRS life of three years. If they sell the old machine now they would receive $1000. However, at the end of five years the old machine is worthless. The cost of the new machine is $12000 and would require an increase in inventory of 1,500. Suppliers would grant the firm an additional 500 in trade credit for the new level of inventory. The expected lfe of the new machine is three years and will reduce annual lablor expenses from 10,000 to 4,000. At the end of the project the firm will be able to sell the new machine for 3,000 an recoup their investment in working capital. The firm has a marginal tax rate of 40 percent. Troll's marginal cost of capital is calculation and readability, round your cash dlows to the nearest whole dollar. Using net present value, and internal rate of return, decide whether they should accept or reject this project.

Answer 1

Book Value of Old Machine = $7,500 × 7%

= $525

After tax proceed from sale of old machine = $525 + ($1,000 - $525) × (1 - 40%)

= $525 + ($475 × 60%)

= $525 + $285

= $810

Net Proceed from sale of old machine after tax is $810.

Annual Cost Saving = $10,000 - $4,000

= $6,000

Annual Cost saving is $6,000.

NPV and IRR of new equipment is calculated in excel and screen shot provided below:

NPV of project is $2,338.17and IRR is 20.10%.

Since, NPV of project is a positive value, so project should be accepted.