A firm is considering an investment in a new machine with a price of $10.9 million to
Question:
A firm is considering an investment in a new machine with a price of $10.9 million to replace its existing machine. The current machine has a book value of $3.8 million and a market value of $2.8 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $4.4 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it also will need an investment of $250,000 in net working capital. The required return on the investment is 10 percent and the tax rate is 21 percent. The company uses straightline depreciation. What are the NPV and IRR of the decision to replace the old machine?
Step by Step Answer:
Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe