A company is considering buying a higher-quality replacement machine at a cost of $950,000. The company will

Question:

A company is considering buying a higher-quality replacement machine at a cost of $950,000. The company will incur installation costs of $15,500. The new machine will also require $50,000 in training costs. The new machine has an expected useful life of 10 years with no salvage value.

The old machine has a market value of $500. The company estimates that it will take four months for the machine to come online, and during this transition period of four months, production will be reduced by 125 units in total. Each unit provides a contribution margin of $102. Afterward, the new machine will generate $225,000 per year in savings in operating costs.

The company’s marginal tax rate is 40%. The project’s cost of capital is 10%, and the newequipment’s CCA rate is 20%.

Required:

1. Compute the NPV, and state whether the company should buy the new high-quality machine.

2. Determine the IRR of this investment.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...

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