Question
Norwich Tool is considering the replacement of an existing machine. The new machine costs $1.2 million and requires installation costs of $150,000. The existing machine
Norwich Tool is considering the replacement of an existing machine. The new machine costs $1.2 million and requires installation costs of $150,000. The existing machine can be sold currently for $185,000 before taxes. It is a 2 year old, cost $700,000 new, and has a $500,000 book value and a remaining useful life of 5 years. This equipment is being depreciated on a straight line basis to a zero salvage value.
Over its 5-year life, the new machine should reduce operating costs by $350,000 per year (ie 800,000 to 450,000 annually). The new machine will be depreciated on a straight line basis over a five year life to a $200,000 salvage value. An increased investment in working capital of $25000 will be needed in year 0 to support the operations of the new equipment. The working capital will be recovered at the end of five years. The firm has a 9% cost of capital and is subject to a 40% tax rate. (Note: Firm revenues will remain constant at 2 million per year with the new equipment)
A. Determine the free cash flows for the project.
B. Determine the NPV, IRR, Payback and Discounted Payback for the project.
*Please show work and if possible do the work on excel. Thank you!
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