The management of heligrande inc is considering the

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The management of HeliGrande, Inc. is considering the replacement of an old machine used in its helicopter repair facility. It is fully depreciated but it can be used by the corporation through 2015. If management decides to replace the old machine, PazCo Taxi Service has offered to purchase it for $60,000 on the replacement date. The old machine would have no salvage value in 2015. If the replacement occurs, a new machine would be acquired from Generous Industries on December 31, 2011. The purchase price of $1,000,000 for the new machine would be paid in cash at the time of replacement. Due to the increased efficiency of the new machine, estimated annual after-tax cash operating cost savings (including tax savings from depreciation) of $325,000 would be generated through 2015, the end of its expected useful life. The new machine is not expected to have any salvage value at the end of 2015. HeliGrande, Inc.'s management requires all investments to earn a 12 percent after-tax return. The new machine would be depreciated using the straight-line depreciation method.

  1. Compute the net present value of the machine replacement investment. Assume all cash flows occur at the end of the year for simplicity. Round to the nearest whole dollar. (Hint: You can access a present value table using this link -

  2. Compute the approximate internal rate of return on the replacement of the machine. Round to the nearest whole percent.

  3. Should the company make the investment in the new machine? Support your answer using your responses to the first two parts of this problem.

Reference no: EM13585249

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