Question

XYZ Company’s machine was purchased 5 years ago for $55,000. It had an expected life of 10 years when it was bought, and its remaining depreciation is $5,500 per year for each year of its remaining life and can be sold for $20,000 at the end of its useful life. A new machine can be purchased for $120,000, including the installation costs. During its 5-year life, it will reduce cash operating expenses by $30,000 per year. Sales revenue will not be affected. At the end of its useful life, the machine is estimated to be sold at $10,000. We will use MARCS depreciation, and the machine will be depreciated over its 5-year property class life. The old machine can be sold today for $35,000.

*The tax rate is 25%

*WACC is 16%

a) what is the amount of the initial cash flow at Year 0 if the new machine is purchased?

b)Calculate the after-tax salvage value of the new machine at the end of the project?

c)Calculate the incremental cash flows that will occur at the end of years 1-5?

D) Calculate NPV, Payback discounted payback and IRR

*Use excel cell reference for the questions for the above questions

Answer 1

Answer:

The cash flows, NPV and IRR calculations are as follows:

Answer (a)

Initial cash flow at Year 0 if the new machine is purchased = - $86,875

Answer (b)

After-tax salvage value of the new machine at the end of the project = $9,228

Answer (c):

Answer (d):

NPV = - $902.54

Since NPV is negative, discounted payback period is more than project life.

IRR = 15.53%