A manufacturing company is considering upgrading an existing machine. The cost of the new machine is 950,000
Question:
A manufacturing company is considering upgrading an existing machine. The cost of the new machine is 950,000 TL and the installation cost is 50,000 dollars. The current machine is sold for $ 200,000 before tax today. The current machine, bought 3 years ago, has a $ 200,000 book value and a 2-year useful life. If it is held for two more years, the market value will be 0 TL at the end of the second year. The new machine has a lifetime of 5 years and the company is expected to reduce operating costs by $ 250.00 per year. The new machine will be available for $ 220,000 after 5 years, but the company will pay a $ 50,000 shipping fee for this sale. An investment of $ 20,000 is required in net working capital to support activities if new machinery is purchased. The firm's capital cost is assumed to be 16% and tax rates 20%.
a) Calculate the current cash flows required to analyze the proposed renewal investment?
b) Calculate the net present value of the proposed investment. (NPV)
c) Find the internal rate of return of the proposed investment (irr)
d)Should the firm invest or refuse? Explain why.