Question
Strong Structures Inc. is considering the replacement of an existing machine. The new machine costs $1,300,000 and requires installation costs of $100,000. The existing machine
Strong Structures Inc. is considering the replacement of an existing machine. The new machine costs $1,300,000 and requires installation costs of $100,000. The existing machine currently has a salvage value of $210,000 before taxes. It was purchased at a price of $1,000,000 (also its depreciable base) and has been depreciated under the MACRS 5-year recovery period. Over the 7-year economic life of the replacement proposal, the new machine should reduce operating costs by $450,000 per year. The new machine will be depreciated under the MACRS 5-year recovery period and can be sold for $180,000 at the end of its economic life. Also, the new machine will require an increase in net working capital of $40,000. The WACC is 12% and marginal tax rate is 40%. a. What is the Net Initial Investment on the project? b. What are the NCFs? c. What is the Terminal Value? d. What is the NPV, IRR and payback period of the proposed project? Make a recommendation on the project based on these results.
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