MOMO-FastCopy considers replacing its park of copiers. The management anticipate that new machines will lead to more economic use of raw materials, reduced labor costs, and increased revenues. The firm estimates that the installation of machines will save $50,000 on raw materials and $75,000 on reduced labor costs and will increase revenues by $200,000 (all estimates are per year).
The proposed machines costs $1,000,000. They will have a five year anticipated life and will be depreciated using MACRS depreciation method toward a zero salvage value (MACRS depreciation rates are given below). However, the company will be able to sell them in the after-market for 10% of its original costs at the end of year 5. The company requires a 12% rate of return from its investment and faces a 35% tax rate (the company overall is profitable).
a) Calculate the NPV and IRR for the project. Should the company replace its copiers?
b) The manager raised some concerns about savings and increased revenues projections. Considering one factor at a time, at what level of annual savings of raw materials, annual labor costs savings, and increased revenues the project will break-even (NPV=0)?
c) Looking at percentage difference between the predicted level and critical (break-even) level of each of the three factors, which of them is the most critical?
The expert calculates the NPV and IRR.