. Consider a new line of equipment that will cost $1.7 million and will save a company $300,000 in operating expenses for the next ten years. The estimated salvage value in ten years is $250,000. The new equipment will not affect sales, but it will result in an increase in Net Working Capital of $230,000.

The new line will replace an old line of equipment that will last for four more years before it could be scrapped for $75,000. If sold today, the old equipment is worth $180,000. The old equipment was purchased five years ago for $1.1m and is being depreciated using the MACRS 7-year rates. The new equipment will also be depreciated using the 7-year rates. The companys marginal tax rate is 30% and their cost of capital is 10%.

Calculate the NPV and IRR of this replacement project. What is the breakeven salvage value for the new machinery? (20 pts.)

MACRS 7-year rates:

0.1429

0.2449

0.1749

0.1249

0.0893

0.0892

0.0893

0.0446