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Part B Trapeze Company is considering replacing an old plant that is currently being used. Although the old plant is fully depreciated, it can still
Part B Trapeze Company is considering replacing an old plant that is currently being used. Although the old plant is fully depreciated, it can still be used for another five years, at which time it would have no terminal value. Trapeze can sell the old plant for $90 000 on the date that the new plant is purchased. If the purchase occurs, the new plant will be acquired for a cash payment of $1.5 million. Because of the increased efficiency of the new plant, estimated annual cash savings of $450 000 would be generated during its useful life of five years. The new plant is not expected to have any terminal value. Trapeze Company requires investments to earn a 12 per cent return. Required (a) Calculate the NPV for replacing the old plant with the new plant. (2 marks) (b) Calculate the IRR to replace the old plant. (1 mark) (c) Calculate the payback period for the new plant, assuming the cash flows take place evenly throughout the year. (1 mark)
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