Question
Auto Maker USA, Inc., a manufacturer of vehicle rims, is considering replacing an existing piece of equipment with a more sophisticated machine. The three year
Auto Maker USA, Inc., a manufacturer of vehicle rims, is considering replacing an existing piece of equipment with a more sophisticated machine. The three year project information is given below. There is no market value for the existing machine after three more years of use, but the new machine can be sold for $80,000 at the end of the third year. They will require a $10,000 investment in net working capital at the start of the project. The firm pays 40% taxes on ordinary income and capital gains.
Project Information | |||
Existing Machine | Proposed Machine | ||
Cost | $155,000 | Cost | $215,000 |
Purchased | 3 years ago | Installation | 20,000 |
Depreciation | MACRS 5-year | Depreciation | MACRS 3-year |
Current Market Value | $95,000 |
Earnings before Depreciation and Taxes | |||
Existing Machine | Proposed Machine | ||
Year | Amount | Year | Amount |
1 | $110,000 | 1 | $180,000 |
2 | $95,000 | 2 | $180,000 |
3 | $85,000 | 3 | $180,000 |
b. Calculate the new machines discounted payback period (show calculator or Excel inputs for partial credit). The company WACC is 10%.
d. Calculate the MIRR for the new machine (show calculator or Excel inputs for partial credit).
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