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Initial investment, payback period, NPV, IRR, MIRR

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XYZ Co. is considering the purchase of a new machine. The machine will cost $250,000 and requires installation costs of $25,000. The existing machine can be sold currently for $25,070. It was purchased three years ago for $83,000 and depreciated using MACRS (you can find the table in the D.Sharing) for five years. It can be operated for another four years. Its market value at that time, if sold, would be $14,000. The new machine has expected life of five years and expected to provide operating cash savings of $88,000 a year for 2 years and $50,000 a year for the next two years before depreciation and taxes (EBD&T). After four years the new machine can be sold for $12,750. To support the increased business resulting from the purchase of new machine, A/R will increase by $12,000; inventory will increase by $25,000 and current liabilities by $41,000. (for the sake of the simplicity the increase will be only at the beginning of the project) The cost of capital is 17% and the tax rate is 40%.

a. Determine the II (Initial Investment)
b. Determine the PP (Payback Period)
c. Determine the NPV, IRR and MIRR
d. Make a recommendation to accept or reject the new investment.

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Solution Summary

Response provides the steps to compute initial investment, payback period, NPV, IRR, MIRR. It also tell the interpretation of these concepts.

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a. Determine the II (Initial Investment)

Initial Investments:

Project's Initial Outlay
Investment in Fixed Assets
Total equipment 250000
Installation cost 25000
Investment in Inventory 25000
Investments in A/R 12000
Less current Liabilities -41000
Less sale of old machinery -25070
Add tax pain on Gain 400
Total cash outflow 221330

DEPRECIATION on Old Machinery YEAR 1 YEAR 2 YEAR ...

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