Expected salvage value-how cash flows are changing

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Reference no: EM131063192

Tyler Company purchased a machine 3 years ago at a cost of $150,000. It had an expected life of 10 years at the time of purchase and an expected salvage value of $5,000. The existing machine costs $54,000 year to run and generates $1,000,000 a year in revenue with a gross profit margin of 20%. The old machine can be sold today for $55,000 and the expectation is that it can be sold for $7,500 in 7 years. A new machine with a 7 year life can be purchased for $225,000. Cash operating expenses will be $65,000 per year. The new machine will boost revenue to $1,075,000 in the first three years of operation and to $1,090,000 per annum for the balance of machine’s life. The machine has a gross profit margin of 23%. At the end of its useful life, the machine will have no value. The firm's tax rate is 34 percent. Straight-line depreciation is used for all assets. The firm has an Actual Collection Period of 63 days and pays its bills after 25 days. The firm’s WACC is 12 percent. Calculate project’s NPV and IRR. Make sure you carefully assess how cash flows are changing.

Reference no: EM131063192

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Expected salvage value-how cash flows are changing : Tyler Company purchased a machine 3 years ago at a cost of $150,000. It had an expected life of 10 years at the time of purchase and an expected salvage value of $5,000. The firm has an Actual Collection Period of 63 days and pays its bills after 25 ..

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