1
Scott Investors, Inc., is considering the purchase of a $447,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $75,000 in five years. The computer will replace five office employees whose combined annual salaries are $155,000. The machine will also immediately lower the firm’s required net working capital by $87,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 32 percent.
Required:
Calculate the NPV if the appropriate discount rate is 12 percent.
2
A firm is considering an investment in a new machine with a price of $12.6 million to replace its existing machine. The current machine has a book value of $4.6 million and a market value of $3.6 million. The new machine is expected to have a four-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $5.1 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $310,000 in net working capital. The required return on the investment is 9 percent, and the tax rate is 39 percent.
Requirement 1:
(a) What is the NPV of the decision to purchase a new machine? (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 1,234,567.89))
NPV $ n/r
(b) What is the IRR of the decision to purchase a new machine? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
IRR n/r %
Requirement 2:
(a)
What is the NPV of the decision to keep the old machine? (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 1,234,567.89))
NPV $ n/r
(b)
What is the IRR of the decision to keep the old machine? (Do not include the percent sign (%). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))
IRR n/r %
3. 6.value:
4 points
Pilot Plus Pens is deciding when to replace its old machine. The machine’s current salvage value is $1.84 million. Its current book value is $1.21 million. If not sold, the old machine will require maintenance costs of $517,000 at the end of the year for the next five years. Depreciation on the old machine is $242,000 per year. At the end of five years, it will have a salvage value of $209,000 and a book value of $0. A replacement machine costs $3.1 million now and requires maintenance costs of $335,000 at the end of each year during its economic life of five years. At the end of the five years, the new machine will have a salvage value of $506,000. It will be fully depreciated by the straight-line method. In five years a replacement machine will cost $3,602,000 . Pilot will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 31 percent and the appropriate discount rate is 12 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should Pilot Plus Pens replace the old machine now or at the end of five years?
Requirement 1:
What is the NPV of the decision to purchase a new machine? (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 1,234,567.89))
NPV $
Requirement 2:
What is the NPV of the decision to keep the old machine? (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 1,234,567.89))