A firm is considering replacing an old machine with a new one.
Old Machine:
•Current Value: $1,000,000
•Remaining Life: 5 years
•Annual Operating Costs: $200,000
New Machine:
•Cost: $3,000,000
•Useful Life: 5 years
•Annual Operating Costs: $50,000
Requirements:
1.Determine the annual cost savings if the new machine is purchased.
2.Calculate the NPV of the cost savings over 5 years at a discount rate of 6%.
3.Compute the IRR for the replacement decision.
4.Recommend whether the firm should replace the old machine.