A company purchased a machine 6 years ago for $500m and a salvage value of $30m. The machine has a useful life of 18 years. Now, the company has found another machine with a price of $700m which generates $25m in cost savings and $12m in revenue. This machine has a useful life of 10 years with no salvage value. If the company chooses to purchase the new equipment, it can sell the old equipment for $400m. The company's tax rate is 21% and the discount rate is 17%. Calculate the cash flow in year 0 assuming the company purchases the new equipment, calculate the incremental cash flow per year and calculate the IRR and NPV of the equipment.
A company purchased a machine 6 years ago for $500m and a salvage value of $30m. The machine has a useful life of 18 years. Now, the company has found another machine with a price of $700m which generates $25m in cost savings and $12m in revenue. This machine has a useful life of 10 years with no salvage value. If the company chooses to purchase the new equipment, it can sell the old equipment for $400m. The company's tax rate is 21% and the discount rate is 17%. Calculate the cash flow in year 0 assuming the company purchases the new equipment, calculate the incremental cash flow per year and calculate the IRR and NPV of the equipment.
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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![A company purchased a machine 6 years ago for $500m and a salvage value of $30m. The machine has a useful life of 18 years. Now, the company has found
another machine with a price of $700m which generates $25m in cost savings and $12m in revenue. This machine has a useful life of 10 years with no
salvage value. If the company chooses to purchase the new equipment, it can sell the old equipment for $400m. The company's tax rate is 21% and the
discount rate is 17%. Calculate the cash flow in year 0 assuming the company purchases the new equipment, calculate the incremental cash flow per year
and calculate the IRR and NPV of the equipment.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcdb7f06a-17c1-4a47-83a0-e86c1eb752e3%2Fcba21415-1e06-4c91-bf62-18837fd83a6f%2Ft2m4l3a_processed.png&w=3840&q=75)
Transcribed Image Text:A company purchased a machine 6 years ago for $500m and a salvage value of $30m. The machine has a useful life of 18 years. Now, the company has found
another machine with a price of $700m which generates $25m in cost savings and $12m in revenue. This machine has a useful life of 10 years with no
salvage value. If the company chooses to purchase the new equipment, it can sell the old equipment for $400m. The company's tax rate is 21% and the
discount rate is 17%. Calculate the cash flow in year 0 assuming the company purchases the new equipment, calculate the incremental cash flow per year
and calculate the IRR and NPV of the equipment.
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