Garco is considering replacing an old machine that is currently being used. The old machine is fully

Question:

Garco is considering replacing an old machine that is currently being used. The old machine is fully depreciated, but it can be used for another 5 years, at which time it would have no terminal value. Garco can sell the old machine for $60,000 on the date that the new machine is purchased.

If the purchase occurs, the new machine will be acquired for a cash payment of $1 million. Because of the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated during its useful life of 5 years. The new machine is not expected to have any terminal value.

REQUIRED

A. Garco requires investments to earn a 12% return. What is the net present value for replacing the old machine with the new machine?

B. What is the internal rate of return to replace the old machine?

C. What is the payback period for the new machine?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...