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# Builtrite is considering the replacement of an existing machine The new machine would cost \$12 million and require \$150000 in installation costs The existing machine can be sold now for

Builtrite is considering the replacement of an existing machine. The new machine would cost \$1.2 million and require \$150,000 in installation costs. The existing machine can be sold now for \$185,000 before taxes. It is two years old, cost \$800,000 and has a book value of \$384,000 according to the 5-year MACRS recovery period. It has a remaining useful life of 5 years. If kept for the next five years it would have a salvage value of \$0. Over the new machine's five year life it would reduce operating costs by \$350,000 a year. The new machine would also be depreciated using the 5-year MACRS recovery period. At the end of 5 years it is estimated that the new machine would have a salvage value of \$200,000. The new machine would require an additional investment in inventory of \$25,000. Builtrite has a 9% cost of capital and an overall marginal tax rate of 40%. Calculate the NPV and IRR for this machine and decide if the new machine should be purchased. MACRS Year Depreciation 1 20% 2 32% 3 19% 4 12% 5 12% 6 5%

May 22 2020 View more View Less