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Your company purchased new equipment. The old equipment is at the end of its life. The...

Your company purchased new equipment. The old equipment is at the end of its life. The new equipment cost $140,000 and has a five-year useful life, with an estimated value of $57,000 after five years. It will be depreciated using a 5-year MACRS schedule. Sales will increase to $47,000 per year and costs will average 38% of sales. Inventory will increase by $4,000 due to increased sales. Your firm’s marginal tax rate is 28%. The discount rate is 9%. What is the NPV, IRR, and Payback Period, PV, PI for this investment?

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Expert Solution

Please see the table below. All financials are in $. Please see the second column to understand the mathematics. The cells colored in yellow contain your answer. Adjacent cell in blue shows the excel formula used to get the answer. I have explained how payback period has been calculated at the end once again.

Payback Period: See the row containing cumulative cash flows. It's  -27,650.56 in year 4. See the cash flows row. It's  72,794.56 for year 5. Hence, the payback period = 4 + 27,650.56 / 72,794.56 = 4.38 years

jeff jeffy answered 1 year ago
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