A company is considering replacing a project which will require the purchase of $1.4 million in...
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A company is considering replacing a project which will require the purchase of $1.4 million in new equipment. The equipment will be depreciated straight line to a zero book value over the 7 year life of the project. The company expects to sell the equipment at the end of the project for 20% of its original cost. . The existing equipment of this project was purchased 3 years back for $700,000 and has been depreciated using 5 year MACRS schedule. This machine has a salvage value of $500,000 today. The machine has another 7 years useful life left, after which it can be sold for $50,000. Annual incremental cost saving from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%. Required: Should the company accept the project by replacing the existing equipment with the new one? Use NPV and IRR decision rule in making your decision. A company is considering replacing a project which will require the purchase of $1.4 million in new equipment. The equipment will be depreciated straight line to a zero book value over the 7 year life of the project. The company expects to sell the equipment at the end of the project for 20% of its original cost. . The existing equipment of this project was purchased 3 years back for $700,000 and has been depreciated using 5 year MACRS schedule. This machine has a salvage value of $500,000 today. The machine has another 7 years useful life left, after which it can be sold for $50,000. Annual incremental cost saving from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%. Required: Should the company accept the project by replacing the existing equipment with the new one? Use NPV and IRR decision rule in making your decision.
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Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt , Eugene F. Brigham
Posted Date:
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