George\'s is considering the purchase of a new machine to replace me that was bo

Question

George's is considering the purchase of a new machine to replace me that was bought 2 years ago. The new machine will cost $52,000 installed and will rapine a $2000 increase in inventory and a $ 1500 increase in accounts payable. Both machines will be depreciated on the 3 year schedule (.33,.45,.15,.07). The old machine can he sold for $20,000 or if maintained for three more years it will have a market value then of $5000. It cost $41,000 when it was new. The new machine will provide revenues of $60000 and expenses of $30,000 each of the three years of its economic life. It should then have a market value of $10,000. The old machine would provide revenues of $40,000 and expenses of $30,000 for each of the next three years also. If the company has an 18% cost of capital is the project acceptable. Show the initial investment, cashflows and the terminal value, as well as the NPV or IRR and your decision.

Explanation / Answer

IRR - 40% and 25%

New machine cost                   52,000 Sell old machine now                   20,000 net initial Outflow                   32,000 Dep 1                   17,160 2                   23,400 3                      7,800 Total Dep                   48,360 WDV                      3,640 Sale value                   10,000 Working capital increase inventory                      2,000 account payable                      1,500                      3,500 New machine Old Machine Revenue                   60,000 40000 expenses                   30,000             30,000 inflow                   30,000             10,000 PVAF(18%,3yrs) 2.17427 2.17427 Total inflow                   65,228             21,743 Salvage value                   10,000                5,000 0.60863 0.60863 PV of terminal flow                6,086.30          3,043.15 NPV             35,814.40       24,785.85

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