Strong Structures Inc. is considering the replacement of an existing machine. The new machine costs $1,300,000 and requires installation costs of $100,000. The existing machine currently has a salvage value of $200,000 before taxes. It was purchased three years ago at a price of $1,000,000 and has a remaining economic life of 5 years. It has been depreciated under the MACRS 5-year recovery period. If the firm decides to keep it, this old machine will be worthless at the end of year 5. Over its 5-year life, the new machine should reduce operating costs by $400,000 per year. The new machine will be depreciated under the MACRS 5-year recovery period and can be sold for $180,000 at the end of its economic life. Also, the new machine will require an investment in net working capital of

Question

$40,000. The firm’s WACC is 12% and marginal tax rate is 40%.

a) Calculate the initial investment, annual after-tax cash flows, and the terminal cash flow of this investment project.
b) Determine the payback period, discounted payback period, NPV, PI, IRR, and MIRR of this project. Should this project be accepted?
c) Perform the same sensitivity analysis as that in Exhibit 13-5, page 402 (except that you should use increments of 5% from -15% to 15%, instead of 10% like in the book) using the following uncertain variables: net working capital investment, price of the new machine, operating cost savings, salvage value of the old machine at the end of its economic life, current salvage value of the old machine. Create a Scatter chart including all of these variables.

Answer 1