Best Leather Ltd is considering the purchase of a new leather-cutting machine to replace an existing...
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Best Leather Ltd is considering the purchase of a new leather-cutting machine to replace an existing machine that has a book value of $9,000 and can be sold today for $8.000. The old machine is being depreciated on a straight-line basis and its estimated salvage value 3 years from now is zero. The proposed new machine is expected to increase sales by $13,000 and reduce operating expenses (excluding depreciation) by $7,000 per year, sales and operating expenses are expected to remain constant during the project life. The proposed new machine has a 3-year life, it costs $40,000 and it can be sold for an expected $3,000 at the end of the third year. Shipping and installation costs totalled $5,000. Net operating working capital is expected to increase by $7,000 and is expected to be fully recovered at the end of year 3. The proposed new machine would be depreciated over its 3-year life using straight line method with an expected salvage value of $3,000. Assume 30% tax rate and a weighted average cost of capital of 16%. Determine the proposed new machine's NPV and IRR and decide if the replacement is viable. Best Leather Ltd is considering the purchase of a new leather-cutting machine to replace an existing machine that has a book value of $9,000 and can be sold today for $8.000. The old machine is being depreciated on a straight-line basis and its estimated salvage value 3 years from now is zero. The proposed new machine is expected to increase sales by $13,000 and reduce operating expenses (excluding depreciation) by $7,000 per year, sales and operating expenses are expected to remain constant during the project life. The proposed new machine has a 3-year life, it costs $40,000 and it can be sold for an expected $3,000 at the end of the third year. Shipping and installation costs totalled $5,000. Net operating working capital is expected to increase by $7,000 and is expected to be fully recovered at the end of year 3. The proposed new machine would be depreciated over its 3-year life using straight line method with an expected salvage value of $3,000. Assume 30% tax rate and a weighted average cost of capital of 16%. Determine the proposed new machine's NPV and IRR and decide if the replacement is viable.
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Answer rating: 100% (QA)
The proposed machines NPV is 424105 and its IRR is 1879 The replacement is viable Ex... View the full answer
Related Book For
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Posted Date:
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