Weisinger Corporation’s management is considering the replacement of an old machine. It is fully depreciated but it can be used by the corporation through 20x5. If management decides to replace the old machine, James Company has offered to purchase it for $60,000 on the replacement date. The old machine would have no salvage value in 20x5. If the replacement occurs, a new machine would be acquired from Hillcrest Industries on December 31, 20x1. The purchase price of $1,000,000 for the new machine would be paid in cash at the time of replacement. Due to the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated through 20x5, the end of its expected useful life. The new machine is not expected to have any salvage value at the end of 20x5. Weisinger’s management requires all investments to earn a 12 percent after-tax return. The company’s tax rate is 40 percent. The new machine would be classified as three-year property for MACRS purposes.

Required:

1. Compute the net present value of the machine replacement investment.

2. Between which of the following two percentages is the internal rate of return on the machine replacement: 4 percent, 6 percent, 8 percent, 10 percent, 12 percent, and 14 percent?

3. Between what two whole numbers of years is the machine replacement’s payback period?

4. How much would the salvage value of the new machine have to be on December 31, 20x5, in order to turn the machine replacement into an acceptable investment?

(CMA, adapted)