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Builtrite is considering the replacement of an existing machine. The new machine would cost $1.2 million and require $150,000 in installation costs. The existing machine can be sold now for $185,000 before taxes. It is two years old, cost $800,000 and has a book value of $384,000 according to the 5-year MACRS recovery period.
It has a remaining useful life of 5 years. If kept for the next five years it would have a salvage value of $0. Over the new machine's five year life it would reduce operating costs by $350,000 a year.
The new machine would also be depreciated using the 5-year MACRS recovery period. At the end of 5 years it is estimated that the new machine would have a salvage value of $200,000.
The new machine would require an additional investment in inventory of $25,000. Builtrite has a 9% cost of capital and an overall marginal tax rate of 40%.
Calculate the NPV and IRR for this machine and decide if the new machine should be purchased
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