Reference no: EM132896526
Problem 1 - (organizing cash flows, NPV, IRR) A company is evaluating the purchase of Machine A. The new machine would cost $120,000 and would be depreciated for tax purposes using the straight-line method over an estimated ten-year life to its expected salvage value of $20,000. The new machine would require an addition of $30,000 to working capital. In each year of Machines A's life, the company would reduce its pre-tax costs by $40,000. The company has a 12% cost of capital and pays taxes at 21% rate.
a. Identify the incremental cash flows from investing in Machine A.
b. Calculate the investment's net present value (NPV).
c. Calculate the investment's internal rate of return (IRR).
d. Should the company purchase Machine A? Why or why not?
Problem 2 - (organizing cash flows, NPV, IRR) This problem follows problem 13. It is now five years later. The company did buy Machine A, but just this week Machine B came on the market; Machine B could be purchased to replace Machine A. If acquired, Machine B would cost $80,000 and would be depreciated for tax purposes using the straight-line method over an estimated five-year life to its expected salvage value of working capital but would save an additional $20,000 per year in pre-tax operating costs. Machine A's salvage value remains $20,000, but it could be sold today for $40,000.
a. Identify the incremental cash flows from converting to Machine B.
b. Calculate the investment's net present value (NPV).
c. Calculate the investment's internal rate of return (IRR).
d. Should the company convert to Machine B. Why or why not?