AADR Corporation is considering the replacement of its Grounding Grinding (GG) m
ID: 2654139 • Letter: A
Question
AADR Corporation is considering the replacement of its Grounding Grinding (GG) machine. The old machine was purchased 4 years ago at an installed cost of $322,000. It is being depreciated straight-line over 7 years. It could be sold now for $149,500. The new GG machine will cost $410,000 with installation costs of $16,000. It will be depreciated straight-line over 6 years. The firm?s tax rate is 40%. Estimated annual Net Cash Benefits for the two GG machines are: 1. Calculate the initial investment (t = 0) for this replacement project. 2. Calculate the incremental cash flows for each year. 3. The company?s cost of capital is 9%. Assuming the GG machine is of average ,isk, calculate the replacement project?s Net Present Value. Is the project acceptable? Why? 4. Calculate the replacement project?s Internal Rate of Return. Is the project acceptable? Why? 5. Assume that this project?s risk is assumed to be greater than average for the company. Calculate the replacement project?s Net Present Value based on a risk adjusted interest rate of 11%. 6. Using Internal Rate of Return, is the replacement project acceptable based on the assumption of higher risk? Why?Explanation / Answer
Answer:-
Old Machine
Purchase 4 years ago
Cost = 322000
Years = 7 years
Sold now = 149500
Depreciation = (cost - scrap) / years
= (322000 - 0) / 7
= 46000
New Machine
Cost = 410000 + 16000
= 426000
Years = 6 years
Intial Investment = 426000 - 149500
= 276500