Reference no: EM131546046
The XYZ Corporation is considering purchasing a replacement for an older machine that is being used in production. The old machine is fully depreciated, and would be sold for $45,000 at the same time the new machine is purchased. XYZ uses the straight-line method of depreciation (without regard to salvage value) for all of its machinery.
A new and more efficient machine could be purchased to replace the older machine at a price of $720,000. Initial training for employees on the new machine would cost $3,000. The new machine would produce annual cash savings of $250,000 for 6 years. At the end of 6 years, the machine could be sold for $100,000.
For depreciation purposes, the machine has a useful life of 10 years. At the end of the third year of production, the new machine would require scheduled maintenance and upgrades which costs $40,000.
Additional inventory ($45,000) and cash ($20,000) would be required, if the new machine is purchased. Corresponding accounts payable would also be anticipated ($25,000). The tax rate for XYZ Corporation is 35%. The required rate of return, annually, for the firm is 16%.
Calculate the Net Present Value and IRR of the new machine.