A company is planning to replace a machine with a new, better performing one. The figures for the investment are as follows:

◦ Purchase of new machine:

◦ cost €2m;

◦ useful life 5 years, residual value nil;

◦ linear depreciation over 5 years;

◦ savings on charges €0.8m per year.

◦ Sale of second-hand machine:

◦ purchase cost €1.5m (machine bought the previous year);

◦ linear depreciation over 5 years (residual value is nil);

◦ net book value today €1.2m;

◦ potential sale price €1.0m.

If the tax rate on profits and capital gains/losses is 40%, what is the “value” for the company of the new machine the company is planning to buy (this company’s required rate of return is 12%)?

Calculate the net present value and the internal rate of return of the planned investment.