Suppose you are thinking to replace an old machine with a new one for your business. The old machine cost you $100,000, and the new one costs $150,000.
The new machine will be depreciated on a three-year MACRS basis. The new machine has a 5-year life and a salvage value of zero at the end of this period.
The old machine was purchased 5 years ago, and it is being depreciated at the rate of $9,000 per year. Its book value is $55,000, and its salvage value today is $65,000. You estimate that you will be able to sell the old machine for $10,000 in 5 years, if you decide to not replace it.
The new machine will save you $50,000 per year. The tax rate is 40%, and the required rate of return is 10%. Based on the NPV and IRR investment criteria, should you replace the old machine?
We are given this template:
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Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
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| Cost Savings |
$ 50,000.00 |
$ 50,000.00 |
$ 50,000.00 |
$ 50,000.00 |
$ 50,000.00 |
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| Depreciation New |
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| Depreciation Old |
$ 9,000.00 |
$ 9,000.00 |
$ 9,000.00 |
$ 9,000.00 |
$ 9,000.00 |
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| EBIT |
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| Taxes |
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| Year |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
| OCF |
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| NCS |
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| Change in NWC |
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| CFFA |
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| NPV |
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| IRR |
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