You are evaluating two different machines. The Alpha 1 has an initial cost of $450,000 with a five-year life that will be depreciated down to zero using the straight-line method. The machine is expected to save the company $125,00 0 in operating costs (pre-tax) each year it is in operation. Assume the machine can be sold for $25,000 at the end of its useful life. The Alpha 2 costs $350,000, has a seven-year life that will be depreciated down to zero using straight-line method. Alpha 2 will only save the company $ 75,000 per year (before taxes) but will have a salvage value of $35,000 at the end of its life. If your tax rate is 23 percent and your discount rate is 9 percent, compute the NPV and IRR for both machines. Which do you prefer?
You are evaluating two different machines. The Alpha 1 has an initial cost of $450,000 with a five-year life that will be depreciated down to zero using the straight-line method. The machine is expected to save the company $125,00 0 in operating costs (pre-tax) each year it is in operation. Assume the machine can be sold for $25,000 at the end of its useful life. The Alpha 2 costs $350,000, has a seven-year life that will be depreciated down to zero using straight-line method. Alpha 2 will only save the company $ 75,000 per year (before taxes) but will have a salvage value of $35,000 at the end of its life. If your tax rate is 23 percent and your discount rate is 9 percent, compute the NPV and IRR for both machines. Which do you prefer?
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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Transcribed Image Text:You are evaluating two different machines.
The Alpha 1 has an initial cost of $450,000 with a five-year life that will be depreciated down
to zero using the straight-line method. The machine is expected to save the company $125,00
0 in operating costs (pre-tax) each year it is in operation. Assume the machine can be sold for
$25,000 at the end of its useful life. The Alpha 2 costs $350,000, has a seven-year life that will
be depreciated down to zero using straight-line method. Alpha 2 will only save the company $
75,000 per year (before taxes) but will have a salvage value of $35,000 at the end of its life. If
your tax rate is 23 percent and your discount rate is 9 percent, compute the NPV and IRR for
both machines.
Which do you prefer?
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