Calculate NPV and IRR for a Replacement Machine
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Calculate NPV and IRR for a Replacement. A firm is considering an investment in a new machine with a price of $12 million to replace its existing machine. The current machine has a book value of $4 million and a market value of $3 million. The new machine is expected to have a four-year life, and the old machine has 4 years left in which it can be used. If the firm replaces the old machine with the new machine it expects to save $4.5 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $250,000 in net working capital. The required return on the investment is 10 percent, and the tax rate is 39 percent. What are the NPV and IRR of the decision to replace the old machine? Please Use Excel.
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Solution Summary
The solution calculates NPV and IRR for a replacement machine.
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- MBA, Indian Institute of Finance
- Bsc, Madras University
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