A firm is considering an investment in a new machine with a price of $18.15 mill

Question

A firm is considering an investment in a new machine with a price of $18.15 million to replace its existing machine. The current machine has a book value of $6.15 million and a market value of $4.65 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.85 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $265,000 in net working capital. The required return on the investment is 12 percent, and the tax rate is 35 percent.

What is the NPV of the decision to purchase a new machine? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16). Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.

What is the IRR of the decision to purchase a new machine? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

What is the NPV of the decision to purchase the old machine? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16). Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Negative amount should be indicated by a minus sign.)

What is the IRR of the decision to purchase the old machine? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16). Negative amount should be indicated by a minus sign.)

Requirement 1:

Explanation / Answer

Ans

Details Amount Amount Purchase New Machine 181,50,000.00 Less Market Value old Machine              46,50,000.00 Savings on account of capital loss=(Book Value-Market Value)(6150000-4650000)*.35                 5,25,000.00    -51,75,000.00 Intial Cost 129,75,000.00 Investment in Working Capital       2,65,000.00 Net Investment 132,40,000.00 Annual Savings net of Tax 6.85*(1-.35)     44,52,500.00 Annual Tax Saving on depreciation (18.15/4)*.35     15,88,125.00 Total Operating Cash inflow     60,40,625.00 PVDF @ 12% =(1-(1.12^-4))/.12 3.037349347 Present Value of Operating Cash Inflow 183,47,488.40 Recovery of Working capital at the end of 4th Years       1,68,412.29 NPV     52,75,900.69 While Trying with a rate of 29.57%, it gives an NPV of 0 Hennce IRR 29.57%

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