Question
The ABD Company is considering buying a new machine for one of its factories. The machine cost is $100,000 and its expected life span is
The ABD Company is considering buying a new machine for one of its factories. The machine cost is $100,000 and its expected life span is 8 years. The machine is expected to reduce the production cost by $15,000 annually. The terminal value of the machine is $20,000 but the company believes that it would only manage to sell it for $10,000. If the appropriate discount rate is 15% and the corporate tax is 40%. (Hint: Assume straight-line depreciation to the terminal value of $20000 in 8 years. Also note at the end of year 8, the machine is sold for $10000 whereas the book value is $20000. So there will be tax credit of 40%*(20000-10000).)
a. Calculate the project NPV. (-37088.2)
b. Calculate the project IRR. (3.42%)
The answers for each part are providided in parentheses. I need to know how to do each part step by step in Excel. Please show formulas used and the inputs for those formulas.
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