The equipment has a delivered cost of $58,000. An additional $4,000 is required to install the new equipment. The new control device falls into the 7-year class for depreciation and will be depreciated using MACRS. At the end of 8 years, the estimated Salvage Value of the new equipment is $20,000.The existing control device has been in use for approximately 10 years, and it has been fully depreciated (that is, its book value is zero for the old device). However, its current market value for the old device is estimated to be $5,000. The applicable tax rate is 34%. The new control device requires lower maintenance costs and frees personnel who would otherwise monitor the system. In addition, it reduces product wastage. In total, it is estimated that during its eight-year life, the yearly savings will amount to $20,000 if the new control device is used. Yearly sales revenue is unchanged. The illustrative firm’s cost of capital is 15%. Since the new machine is more efficient, that it will require an immediate increase in working capital of $25,000 (raw materials) which is eliminated (freed up and returned to us in full) at the end of the machine’s life. Calculate, interpret, and make an investment decision using NPV. Calculate and make an investment decision using IRR.
The equipment has a delivered cost of $58,000. An additional $4,000 is required to install the new equipment. The new control device falls into the 7-year class for depreciation and will be
Since the new machine is more efficient, that it will require an immediate increase in working capital of $25,000 (raw materials) which is eliminated (freed up and returned to us in full) at the end of the machine’s life. Calculate, interpret, and make an investment decision using NPV. Calculate and make an investment decision using IRR.
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