Reference no: EM132953453
Question - Your manager has gathered the following information to determine whether an old machine should be replaced with a new machine:
?Installed cost of a new machine = $275,000
?The old machine can be sold for $40,000
?Current book value of the old machine = $10,000
?Increase required in working capital = $10,000
?Increase in annual sale = $110,000
?Increase in cost of raw materials = $15,000/year
?Increase in depreciation expense = $10,000/year
?Remaining life of new and old machines = 5 years
?Seven years from now the new machine can be sold for $45,000
?Seven years from now the old machine can be sold for $5,000
?Book value of both machines five years from now will be zero
?The firm's tax rate is 40%
Discount rate is 12%
Required -
1. Find the net present value and determine whether the purchase is warranted or not.
2. Find the internal rate of return.
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