Michael\'s is considering purchasing a new machine. the old machine it has right
ID: 2755213 • Letter: M
Question
Michael's is considering purchasing a new machine. the old machine it has right now was bought 2 years ago for 30,000 with an assume life if 5 years and an assume salvage value of 5,000. the firm uses straight line depreciation. the old machine can be sold for 25,000 the new machine can be purchased today for 40,000 the new machine will have a 5 year life and will be depreciated to 5,000 using straight line depreciation. with the new sewing machine the firm is expected to have additional revenue of 15,000 for the next 5 years. the variable cost is 40% of the revenue and the fixed cost is 3,000 each year. suppose Michaels allows its customers to pay their bills with an average 3 month delay. and its inventories is 15% of next years expense. if the opportunity cost of capital is 12% corporate tax rate is 35% and capital gain is 15% what are the projects NPV and IRR? what happens to NPV when your revenue goes up by 10% because of good economy? Michael's is considering purchasing a new machine. the old machine it has right now was bought 2 years ago for 30,000 with an assume life if 5 years and an assume salvage value of 5,000. the firm uses straight line depreciation. the old machine can be sold for 25,000 the new machine can be purchased today for 40,000 the new machine will have a 5 year life and will be depreciated to 5,000 using straight line depreciation. with the new sewing machine the firm is expected to have additional revenue of 15,000 for the next 5 years. the variable cost is 40% of the revenue and the fixed cost is 3,000 each year. suppose Michaels allows its customers to pay their bills with an average 3 month delay. and its inventories is 15% of next years expense. if the opportunity cost of capital is 12% corporate tax rate is 35% and capital gain is 15% what are the projects NPV and IRR? what happens to NPV when your revenue goes up by 10% because of good economy?Explanation / Answer
30843.17
Since NPV is Positive better to procure new Machine.
Year New Machine cost Old Machine Tax saving on New Machine depreciation Tax Expense on New Machine depreciation Additional Revenue net of Tax Net Cash flow ( sum of all previous columns) Pv factor @ 15% Pv @ present Value Terms 0 40000 -25750 14250 1 14250 1 2800 -1750 3900 4950 0.86956522 4304.348 2 2800 -1750 3900 4950 0.75614367 3742.911 3 2800 -1750 3900 4950 0.65751623 3254.705 4 2800 -1750 3900 4950 0.57175325 2830.179 5 2800 -1750 3900 4950 0.49717674 2461.025 NPV30843.17
Since NPV is Positive better to procure new Machine.