Very Old Inc. is debating the purchase of a new fabricating machine. The company owns an old fabricating machine that was purchased 3 years ago for $350,000 is worth $150,000 today, and will have a salvage value of $80,000 after 4 more years. The old machine generates revenues of $500,000 per year. The old machine has operating costs of $280,000 per year. The old machine requires an investment in operating net working capital of $50,000. This investment is not expected to change as long as the company owns the old machine.
The new machine would cost $750,000. The new machine would last 4 years. The expected salvage value is $135,000. The new machine will generate revenues of $720,000 per year. The new machine will have operating costs of $320,000 per year. The new machine would require an investment of only $32,000 in operating net working capital. This investment is not expected to change as long as the company owns the old machine.
The corporate tax rate is 20%, the CCA rate is 30% and the required rate of return is 12%.

Problem  

Calculate the NPV of replacing the old machine. (Hint: Prior to calculating the NPV you will need to calculate the incremental cash flows.)

Answer rating: 100% (QA)

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