The Zubair Equipment Company purchased a machine 4 years ago at a cost of $250,000. It had an expected life of 7 years at the time of purchase and an expected salvage value of $40,000 at the end of the 7 years. It is being depreciated by the straight line method toward a salvage value of $40,000. A new machine can be purchased for $650,000, including installation costs. Over its 5 year life, it will reduce cash operating expenses by $70,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. Straight line method of depreciation will be used with no salvage value. The old machine can be sold today for $55,000. The firm’s tax rate is 35 percent. The appropriate discount rate is 13 percent. Required: What are the Payback period, profitability index and NPV of this project? Should the firm replace the old machine?
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The Zubair Equipment Company purchased a machine 4 years ago at a cost of $250,000. It had an expected life of 7 years at the time of purchase and an expected salvage value of $40,000 at the end of the 7 years. It is being
A new machine can be purchased for $650,000, including installation costs. Over its 5 year life, it will reduce cash operating expenses by $70,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. Straight line method of depreciation will be used with no salvage value.
The old machine can be sold today for $55,000. The firm’s tax rate is 35 percent. The appropriate discount rate is 13 percent.
Required: What are the Payback period, profitability index and NPV of this project? Should the firm replace the old machine?
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