Compute the internal rate of return of grey replacement

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Grey is considering the replacement of some machinery that has zero book value and a current market value of $2,800. One possible alternative is to invest in new machinery that costs $30,000. The new equipment has a four-year service life and an estimated salvage value of $3,500, will produce annual cash operating savings of $9,400, and will require a $2,200 overhaul in year 3. The company uses straight-line depreciation.

Required:

Problem A. Prepare a net-present-value analysis of Grey's replacement decision, assuming an 8% hurdle rate. Should the machinery be acquired? Why or Why Not?

Problem B. Compute the internal rate of return (IRR) of Grey's replacement decision. (Hurdle rate is also 8%) Should the machinery be acquired? Why or Why Not?

Reference no: EM132954290

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