Builtrite is considering the replacement of an existing machine. The new machine would cost $1.2 million and require $150,000 in installation costs. The existing machine can be sold now for $185,000 b

Builtrite is considering the replacement of an existing machine. The new machine would cost $1.2 million and require $150,000 in installation costs. The existing machine can be sold now for $185,000 before taxes. It is two years old, cost $800,000 and has a book value of $384,000 according to the 5-year MACRS recovery period. It has a remaining useful life of 5 years. If kept for the next five years it would have a salvage value of $0. Over the new machine’s five year life it would reduce operating costs by $350,000 a year. The new machine would also be depreciated using the 5-year MACRS recovery period. At the end of 5 years it is estimated that the new machine would have a salvage value of $200,000. The new machine would require an additional investment in inventory of $25,000. Builtrite has a 9% cost of capital and an overall marginal tax rate of 40%.Calculate the NPV and IRR for this machine and decide if the new machine should be purchased.                      MACRS        Year  Depreciation         1             20%         2             32%         3             19%         4             12%         5             12%         6              5%

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *