Double-0 Corporation is considering the purchase of a replacement machine. The new machine is priced at $64,000.

Question:

Double-0 is considering the purchase of a replacement machine. The new machine is priced at $64,000. However, the vendor has offered Double-0 a $10,000 trade-in allowance for the old machine. The old machine has a net book value of $4,000 and a tax basis of zero. The new machine will perform essentially the same function as the old machine, except that it will be able to operate at an increased capacity. The following cash flows (which have been adjusted for the anticipated effects of inflation) are predicted over the estimated useful life of the new machine:

Double-0 Corporation is considering the purchase of a replacement machine.

For financial accounting purposes, the new machine is to be depreciated on a straight-line basis over a period of 7 years, with an expected salvage value of $6,000. For tax purposes, however, the machine will be depreciated under MACRS as 5-year property. The company's weighted-average cost of capital is 12%, and its tax rate is 40%.
Required:
Using the MACRS rates provided in Exhibit 22-4, determine after-tax cash inflows and then compute each of the following:
(1) Payback period in years
(2) Accounting rate of return on the original investment and also on the average investment
(3) Net present value and the Net present value index
(4) Internal rate of return

Net Present Value
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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... Salvage Value
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