Machine Replacement and Sensitivity Analysis Without Considering Taxes Ann & Andy Machine Company bought a cutting machine, Model KC12, on March 5, 2010, for $5,000 cash. The esti- mated salvage value and estimated life were $600 and 11 years, respectively. On March 5, 2011, Ann, the company CEO, learned that she could purchase a different cutting machine, Model AC1, for $8,000 cash. The new machine would save the company an estimated $750 per year in cash operating costs compared to KC12. AC1 has an estimated salvage value of $400 and an estimated life of 10 years. The company could get $3,000 for KC12 on March 5, 2011. The company uses the straight-line method for depreciation (non-MACRS-based) and a 12 percent discount rate.

Required

1. Compute, for AC1, the:

a. Payback period of the proposed investment, under the assumption that the cash inflows occur evenly throughout the year.

b. Book rate of return (ARR) using the average investment; assume that any loss on the disposal of the existing machine is spread out evenly over the 10-year life of the new machine.

c. Net present value (NPV).

d. Internal rate of return (IRR).

e. Modified internal rate of return (MIRR) also, explain the difference between a project's IRR and its MIRR.

2. Should the firm purchase AC1? Why?

3. What is the minimum (or maximum) savings that AC1 must have without altering your decision in requirement 2?