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 $200,000 before taxes. It was purchased three years ago at a price of $1,000,000 and has a remaining economic life of 5 years. It has been depreciated under the MACRS 5-year recovery period. If the firm decides to keep it, this old machine will be worthless at the end of year 5. Over its 5-year life, the new machine should reduce operating costs by $400,000 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 investment in net working capital of $40,000. The firms WACC is 12% and marginal tax rate is 40%.
- Calculate the initial investment, annual after-tax cash flows, and the terminal cash flow of this investment project.
- Determine the payback period, discounted payback period, NPV, PI, IRR, and MIRR of this project. Should this project be accepted?
Perform the same sensitivity analysis as that in Exhibit 13-5, page 402 (except that you should use increments of 5% from -15% to 15%, instead of 10% like in the book) using the following uncertain variables: net working capital investment, price of the new machine, operating cost savings, salvage=v=
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