Question
The Chocolate Company is thinking of replacing a machine originally purchased 10 years ago at a cost of $70,000 and has been depreciated to a
The Chocolate Company is thinking of replacing a machine originally purchased 10 years ago at a cost of $70,000 and has been depreciated to a book value of zero. If Chocolate Co. does not replace the machine, it anticipates being able to use the existing machine for 8 more years at which time its salvage value would be zero. The firm's use of its existing machine is expected to generate revenue of $190,000 per year and cash operating expenses of $120,000 per year.
Chocolate Co. estimates that its existing machine can be sold today for $5,000. The new machine will cost the firm $100,000, which will be depreciated over 4 years according to the following depreciation rates: 40% in each of years 1 and 2, and 10% in each of years 3 and 4. The new machine qualifies for an immediate 3% investment tax credit. Chocolate Co. anticipates that at the end of the machine's 8-year economic life it will be sold for $7,000. Chocolate Co. expects the firm's annual revenues and operating costs to increase to $280,000 and $180,000 respectively.
Chocolate Company's marginal tax rate is 40%. Cost of capital of is 15%.
1 - Calculate net present value for this project.
2 - In excel, calculate the internal rate of return.
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