Question

The Erickson toy company currently uses an injection- molding machine that was purchased 5 years ago.This machine is being depreciated on a straight-line basis toward a $10,000 salvage value, and it has 5 years of remaining life. The cost of the machine 5 years was $100,000. It can be sold for $40,000 at this time.

The Firm is offered a replacement machine, which has a cost of $120,000 and an estimated useful life of 5 years and an estimated salvage value of zero. The replacement machine would permit an output expansion so sales would rise by $30,000 per year, but cost would increase by $5,000 per year. The new machine would require that inventories increase by $2000 initially. The tax rate 40% and the firm's COC is 12%. Should it replace the old machine? Calculate the NPV and IRR of this decisio

Answer 1

Since the NPV is positive it should replace the machine.