Considering replacing molding equipment

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Reference no: EM131059162

PC company is considering replacing molding equipment used to make party cups. The current equipment was purchased two years ago for $95,000. At the time of purchase it had a 7-year life with an expected salvage value of $10,000. If sold today Dolphin expects to receive $55,000 for the machine. Dolphin depreciates all assets using straight-line depreciation.

New machinery today will cost $145,000. The new machinery is expected to last 5 years and has a salvage value of $15,000. The new machinery will lower annual operating costs by $35,000 per annum. The new machine is expected to increase revenue as shown below. The firm has a gross profit margin on sales of 20%.

Year 1 120,000

Year 2 130,000

Year 3 140,000

Year 4 125,000

Year 5 125,000

Assume a tax rate of 40% and a cost of capital of 11%. The project will be financed with an 8% five year loan. What is the NPV of the project? What is the IRR of the project?

Reference no: EM131059162

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