King Fisher Aviation is considering an investment in a new technology for a drone project with a price of $16 million. Their current technology has a book value of $5 million and a market value of $5 million. The new technology is expected to have a five (5) year life, and the old technology has three (3) years left in which it can be expected to be used. If the firm replaces the old technology with the new technology it expects to save $5.7 million in operating costs each year over the next four years. If the firm purchases the new technology, it will also need an investment of $300,000 in net working capital. The required return on the investment is 12 percent, and the tax rate is 39 percent.

What are the NPV and IRR of the decision to replace the old technology?

Fill in the values in the spreadsheet.

Cost of new machine $16,000,000

Old machine book value $5,000,000

Old machine market value $5,000,000

Years of operation 5

Saved operating costs $5,700,000

Net working capital $300,000

Required return 12%

Tax rate 39% *Depreciation straight-line