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You are considering the replacement of a machine used in your production line. A new model will enable your firm to produce and sell more,
You are considering the replacement of a machine used in your production line. A new model will enable your firm to produce and sell more, as the following table illustrates: The product will sell for exist50 per unit over the projected 4-year period. Variable costs will amount to 60% of each year's sales, and total fixed operating costs are estimated to start at exist100,000 for Year 1 and increase by 3% each year thereafter. The new machine has a purchase price of exist250,000, plus the firm will have to pay exist20,000 for delivery and installation. The machine will be depreciated using MACRS over a 3-year class life. It is estimated that the machine can be sold for exist10,000 at the end of its 4-year useful life. The new machine will require an additional investment in net working capital of exist25,000. The old machine was purchased 3 years ago at an installed cost of exist180,000. It is being depreciated using MACRS over a 3-year class life. You have a firm offer from another company to buy the old machine for exist15,000. Estimate a incremental cash flows associated with this proposed project. Use a marginal tax rate of 40% for all of your tax calculations. Find the payback period, the net present value, the profitability index, and the internal rate of return if the required rate of return for this project is 15%
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