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Consider a new line of equipment that will cost $760,000 and will
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Consider a new line of equipment that will cost $760,000 and will save a company $160,000 in operating expenses for the next ten years.  It will not affect sales, but it will result in an increase in Net Working Capital of $60,000. 

The new line will replace an old line of equipment that will last for about 5 more years before it could be scrapped for $40,000.  If sold today, the old equipment is worth $120,000.  The old equipment was purchased five years ago for $450,000 and is being depreciated using the MACRS 7-year rates.  The new equipment will also be depreciated using the 7-year rates.  The company?s marginal tax rate is 35% and their cost of capital is 11%.

Calculate the NPV and IRR of this replacement project.


Year

 

0

 

New Equipment Cost

 

Post Tax Annual Operating Expenses Saving

 

Increase in Working Capital

 

Post Tax Sale Value of Old Equipment

 

Post Tax Salvage Value Lost

 

Depreciation Tax Loss on Old...

 







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