Your firm is currently evaluating the purchase of a new machine called a “Haley Special.” The “Special” will replace your existing machine, which has 3 years left of its 6-year useful life. The existing machine has been depreciated using straight-line depreciation and initially cost $180,000. The existing machine has a market value of $110,000. The “Special” will cost $330,000 with an additional installation charge of $30,000 and will be depreciated using the 5 year straight-line method. Two workers will have to be trained on this machine at a cost of $5,000 each. The special will require the use of an adjacent warehouse, due to the increase in production. This warehouse is currently being leased to a firm for $35,000 on an annual basis. There is a $5,000 annual maintenance cost associated with this facility that will be paid whether the warehouse is leased or the “Special” is purchased. The “Special” will generate an extra pre-tax profit of $225,000 per year over its useful life. The “Special” will require additional inputs; therefore, accounts payable is estimated to increase by $150,000. Since the “Special” will increase production, inventory is expected to increase by $300,000 and accounts receivable is expected to increase by $100,000. After 3 years, a new technology will be available, which will involve more automated processes and less human capital. At this time the “Special” will be sold for $220,000 with cleanup costs estimated to be $30,000. The tax rate is 34%. The firm uses a discount rate of 8.75% for all capital replacement projects. Should the machine be purchased? Calculate NPV and IRR.

Answer rating: 100% (QA)

Yes the machine should be purchased NPV 225000 x PVIF ... View the full answer