Problem #3 (11 points)

I am considering purchasing a new golf ball manufacturing machine. The total installed cost of this lovely piece of equipment is $2.2 million. My existing machine cost me $1 million 10 years ago, currently has no book value ($0) & a competitor will pay me $1.2 million for it before taxes but I am subject to a 40% tax rate.

Because of this new piece of equipment, my annual sales for the next 5 years are expected to be $900,000 more than what I am currently making with my current equipment. Expenses (for the new equipment) will amount to 50% of that increased revenue. I will undergo no change in net working capital & will depreciate the new equipment using a 5 year-recovery period under MACRS. My cost of capital is 11% & there is no terminal cash flow expected.

1. Determine my initial investment for the new equipment
2. Determine my Operating cash inflows for the new equipment (consider depreciation in year 6)
3. What's my payback period?
4. What's the NPV?
5. What's the IRR? (to the nearest whole number)