Brown Industries is considering replacing an old machine that is currently being used. The old machine is fully depreciated, but it can be used for another 7 years, at which time it would have no salvage value. Brown can sell the old machine for $60,000 on the date that the new machine is purchased. Brown has an effective tax rate of 30%, so the gain on the sale of the old machine will be fully taxable.

If the purchase occurs, the new machine will be acquired for a cash payment of $1,000,000. Because of the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated during its useful life of 5 years. The new machine is expected to have a salvage value of $30,000.

Brown has a minimum required rate of return of 10% and uses MACRS depreciation. The machine falls into the five year asset category with the half-year convention which has the following depreciation rates:

Year Rate

1 20%

2 32%

3 19.20%

4 11.52%

5 11.52%

6 5.76%

Create and submit a printout of an Excel spreadsheet (along with the spreadsheet in formula view using the CTRL ~ function) that will answer the following questions:

1) What is the net present value of replacing the old machine with the new machine? (Use the =NPV function and then subtract the initial cash outflow to obtain the net present value).

2) What is the internal rate of return to replace the old machine? (Use the =IRR function).

3) What is the payback period for the new machine?

4) Should Brown purchase the new machine? Why or why not? You can type your answer in your Excel spreadsheet.

I'm having trouble using Excel to do the work. Can you show me how to do # 2 # 3. In formula view like it ask in the problem so I can better understand hoe to use Excel.