Chapter 6, Problem 25QAP

Summary Introduction

Adequate information:

Cost of new machine = $15,600,000

Book value of current machine = $5,400,000

Market value of current machine = $4,100,000

Useful life of new machine = 4 years

Savings = $6,300,000

Net working capital of New machine = $250,000

Tax rate = 21% or 0.21

Required return, r = 10% or 0.10

To compute: The NPV and IRR of the decision to replace the old machine.

Introduction:

Net present value: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

Internal rate of return: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.