Evaluate the relative merits of replacing old control device

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Reference no: EM13928279

Show that the internal rate of return of the following investment is 0, 100, and 200 percent:

Net investment $1,000 Year 0 Net cash flows þ6,000 Year 1 11,000 Year 2

6,000 Year 3

Commercial Hydronics is considering replacing one of its larger control devices. A new unit sells for $29,000 (delivered). An additional $3,000 will be needed to install the device. The new device has an estimated 20-year service life. The estimated salvage value at the end of 20 years will be $2,000. The new control device will be depreciated over 20 years on a straight-line basis to $0. The existing control device (original cost ¼ $15,000) has been in use for 12 years, and it has been fully depreci- ated (that is, its book value equals zero). Its scrap value is estimated to be $1,000. The existing device could be used indefinitely, assuming the firm is willing to pay for its very high maintenance costs. The firm's marginal tax rate is 40 percent. The new control device requires lower maintenance costs and frees up personnel who normally would have to monitor the system. Estimated annual cash savings from the new device will be $9,000. The firm's cost of capital is 12 percent.

Evaluate the relative merits of replacing the old control device using the net present value approach.

Reference no: EM13928279

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