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Vastine, Nova and Benson: Calculate book value, payback period, NPV, IRR

1. Vastine Medical, Inc. is considering replacing its existing computer system, which was purchased 2 years ago at a cost of $325,000. The system can be sold today for $200,000. It is being depreciated usinf MACRS and a 5-year recovery period (see Table 3.2, page 108). A new computer system will cost $500,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate.

a. Calculate the book value of the existing computer system.
b. Calculate the after-tax proceeds of its sale for $200,000.
c. Calculate the initial investment associated with the replacement project.

2. Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternative ones. The first machine requires an initial investment of $14,000 and generates annual after-tax cash inflows of $3,000 for each of the next 7 years. The second machine requires an initial investment of $21,000 and provides an annual cash inflow after taxes of $4,000 for 20 years.

a. Determine the payback period for each machine.
b. Comment on the acceptability of the machines, assuming that they are independent projects.
c. Which machine should the firm accept? Why?
d. Do the machines in the problem illustrate any of the weaknesses of using payback? Discuss.

3. Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $18,250, and the project is expected to yield after-tax cash inflows of $4,000 per year for 7 years. The firm has a 10% cost of capital.

a. Determine the net present value (NPV) for the project.
b. Determine the internal rate of return (IRR) for the project.
c. Would you recommend that the firm accept or reject the project? Explain your answer

Solution Summary

The book value of the existing computer systems for Vastine Medical, Inc is provided.

$2.19