A company is considering replacing an existing piece of equipment with a more advanced machine. The following information is provided. Current Machine New Machine Cost = $100.000 Cost = $150.000 Purchased 2 years ago Installation Cost = $20.000 The period of depreciation is 5 years and the The period of depreciation is 5 years and the direct depreciation method is used. direct depreciation method is used. The current value of the machine = $105.000 The remaining usable life is 5 years Years 1 2 3 4 5 Profit Before Depreciation and Taxes Current Machine $160.000 $150.000 $140.000 $140.000 $140.000 New Machine $170.000 $170.000 $170.000 $170.000 $170.000 The expected usable life is 5 years The company pays tax at the rate of 20%. A. Calculate the Initial Investment Amount? B. Calculate the additional annual Cash Flow? C. Calculate the Payback Period of the investment. Since the desired payback period is 3 years, should the company make this investment? D. If the Cost of Capital is 15%, calculate the Net Present Value of the investment. According to the net present value method, should the company make this investment? Explain. E. Calculate the Internal Rate of Return. According to the Internal Rate of Return method, should the company make this investment? Explain.
A company is considering replacing an existing piece of equipment with a more advanced machine. The following information is provided. Current Machine New Machine Cost = $100.000 Cost = $150.000 Purchased 2 years ago Installation Cost = $20.000 The period of depreciation is 5 years and the The period of depreciation is 5 years and the direct depreciation method is used. direct depreciation method is used. The current value of the machine = $105.000 The remaining usable life is 5 years Years 1 2 3 4 5 Profit Before Depreciation and Taxes Current Machine $160.000 $150.000 $140.000 $140.000 $140.000 New Machine $170.000 $170.000 $170.000 $170.000 $170.000 The expected usable life is 5 years The company pays tax at the rate of 20%. A. Calculate the Initial Investment Amount? B. Calculate the additional annual Cash Flow? C. Calculate the Payback Period of the investment. Since the desired payback period is 3 years, should the company make this investment? D. If the Cost of Capital is 15%, calculate the Net Present Value of the investment. According to the net present value method, should the company make this investment? Explain. E. Calculate the Internal Rate of Return. According to the Internal Rate of Return method, should the company make this investment? Explain.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:A company is considering replacing an existing piece of equipment with a more advanced
machine. The following information is provided.
Current Machine
New Machine
Cost = $150.000
Purchased 2 years ago
Installation Cost = $20.000
The period of depreciation is 5 years and the The period of depreciation is 5 years and the
direct depreciation method is used.
direct depreciation method is used.
The current value of the machine = $105.000
The remaining usable life is 5 years
Cost $100.000
=
Years
1
2
3
4
5
Profit Before Depreciation
and Taxes
Current
Machine
$160.000
$150.000
$140.000
$140.000
$140.000
New
Machine
$170.000
$170.000
$170.000
$170.000
$170.000
The company pays tax at the rate of 20%.
A. Calculate the Initial Investment Amount?
The expected usable life is 5 years
B. Calculate the additional annual Cash Flow?
C. Calculate the Payback Period of the investment. Since the desired payback period is 3
years, should the company make this investment?
D. If the Cost of Capital is 15%, calculate the Net Present Value of the investment.
According to the net present value method, should the company make this investment?
Explain.
E. Calculate the Internal Rate of Return. According to the Internal Rate of Return
method, should the company make this investment? Explain.
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