Reference no: EM131871630

Case Scenario: Capital Budgeting

Andrusco Corp's new V-P of Finance, Ms. Carruzco, has discovered that a production machine authorized for purchase last year by her fired predecessor, Mr. Gutierrez, is not functioning well on the production floor. Therefore, she has decided to replace this machine with a new one that will cost $50,000, have a 5-year life, will use DDB depreciation, and have a residual value of $5,000. The old machine was scheduled for SYD depreciation with a 5-year life, a $2,000 salvage value; and originally cost $40,000. The old machine can be sold on today's market for$30,000. The new U. S. President Mr, D. J. Tromp, has wisely reinstituted the ITC for corporations that the prior Democrat, Mr. B. Obama, had foolishly outlawed. New unadjusted cash flows from the new equipment will be $16,000, 9,000, 9000, 9000 and 13,000. Maintenance costs will be 5,000 in both years 2 and 4. A commercial crane will have to be hired to place the new equipment on the shop floor to the tune of $2,500. The company can raise funds by selling junk bonds at 10.4% over the current inflation rate.

Ms. Carruzco will do an NPV analysis on this new project, but the hard-nosed President of the Board of Directors, Mr. G. Andrusco, wants to know, regardless of the NPV, what the IRR of the new investment is.

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