Year Machine A Machine B ---- --------- --------- 0 -$1,000 -$1,000 1 0 417 2 0 417 3 0 417 4 1,938 417
A. What is the internal rate of return for each machine?
IRRA = 0.18; IRRB = 0.24
B. If the cost of capital for Acme Products is 5%, which of the following is …show more content…
Natural Beverages is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $400,000 and a remaining useful life of five years. The salvage value of the old machine (for depreciation and cash flow purposes) is $50,000. The firm can sell it now to another firm in the industry for $200,000. The new machine has a purchase price of $1.2 million, an estimated useful life of five years, and an estimated salvage value in five years of $20,000. Additional costs of installation will be $25,000. It is expected to economize on operating costs and to reduce the number of defective bottles. In total, an annual saving of $250,000 will be realized if the new machine is installed. The new machine will require an additional $15,000 in inventory (spare parts). The company is in the 40 percent marginal tax bracket and has a 12 percent required rate of return. The machine qualifies as a 3-year property under MACRS (33%, 45%, 15%,