problem: XYZ Co. is considering the buy of a new machine. The machine will cost dollar 250,000 and requires installation costs of dollar 25,000. The existing machine can be sold currently for dollar 25,070. It was purchased three years ago for dollar 83,000 and depreciated using MACRS. It can be operated for another four years. Its market value at that time, if sold, would be dollar 14,000. The new machine has expected life of five years and expected to provide operating cash savings of dollar 88,000 a year for 2 years and dollar 50,000 a year for the next two years before depreciation and taxes (EBD&T). After four years the new machine can be sold for dollar 12,750. To support the increased business resulting from the purchase of new machine, A/R will increase by dollar 12,000; inventory will increase by dollar 25,000 and current liabilities by dollar 41,000. The cost of capital is 17% and the tax rate is 40%.
[A] Find the Initial Investment (II)
[B] Find the Payback Period (PP)
[C] Find the NPV, IRR and MIRR
[D] Make a recommendation to accept or reject the new investment.