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Business Finance Problem

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Question

Question;Business Finance;A firm is considering the replacement of an existing machine with a newer model. The old machine was purchased 5 years ago. At that time, its cost was $7,500 and it was expected to have a useful life of 15 years. Its current book value is $5,000 while its current market value is only $1,000;The new machine will have a fully installed cost of $10,000 and an estimated useful life of 10 years, with no expected salvage value or removal costs.;If the new machine is purchased, labor cost savings are estimated to be $1,000 per year, and the cost of waste materials is expected to decline by $2,000 per year.;Assume straight-line depreciation, a corporate tax rate of 30 percent (the same rate applies to gains and losses on sales of capital equipment). The firm?s cost of capital is 20 percent.;a) Determine the initial cash outlay (ICO). (This is the net cash outflow at t=0).b) Determine the net after-tax incremental cash flows.c) Determine the NPV for this investment.d) Determine the IRR for this investment.

 

Paper#50716 | Written in 18-Jul-2015

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