Question
A company is evaluating the replacement of an old machine with a new one. Last year, the company hired a consultant to conduct a feasibility
A company is evaluating the replacement of an old machine with a new one. Last year, the company hired a consultant to conduct a feasibility study about this replacement project, which cost them $800,000 at that time. The consulting fees were expensed last year. The old machine was purchased 3 years ago for $2.8 million and was being depreciated using MACRS 5- year class (20%, 32%, 19.2%, 11.52%, 11.52% and 5.76%). The old machine can be sold for $800,000 at this time. If the old machine is not replaced, it can be sold for $250,000 four years from now. The companys annual revenue and operating costs are $900,000 and $500,000 respectively with this machine.
The replacement machine has a cost of $2.5 million, an estimated useful life of 4 years. This machine will be depreciated using straight-line method to 0 salvage value. The replacement machine would permit an output expansion, The annual revenue and operating costs will be $1.8 million and 1 million respectively. The new machine would require that inventories be increased by $850,000 and AR increased by $350,000. At the same time accounts payable and accrued expenses would simultaneously increase by $500,000 and 200,000 respectively. The interest expense on the debt component of the capital required for this project will be $350,000 annually. The new machine can be sold for $150,000 at the end of 4 years to another company.
The companys marginal federal-plus-state tax rate is 40%, and its WACC is 12%.
5-What is the NPV of the project?
a) -924,158
b) -847,369
c) -715,364
d) -693,486
e) -652,854
NEED to see work and formulas PLZ. Will Rate! :)
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