You are evaluating two different machines. The Piton I costs $450,000, has a five-year life that will be depreciated dow
Posted: Thu May 05, 2022 8:02 am
You are evaluating two different machines. The Piton I costs
$450,000, has a five-year life that will be depreciated down to
zero using the straight-line method. The machine is expected to
save the company $125,000 in operating costs (pre-tax) each year it
is in operation. Assume the machine can be sold for $25,000 at the
end of its useful life.
The Piton II costs $350,000, has a seven-year life that will be
depreciated down to zero using straight-line method. Piton II will
only save the company $75,000 per year (before taxes) but will have
a salvage value of $35,000 at the end of its life. If your tax rate
is 23 percent and your discount rate is 9 percent, compute the NPV
and IRR for both machines. Which do you prefer? If Piton 1 required
an immediate investment of $25,000 of working capital, would your
answer change?
$450,000, has a five-year life that will be depreciated down to
zero using the straight-line method. The machine is expected to
save the company $125,000 in operating costs (pre-tax) each year it
is in operation. Assume the machine can be sold for $25,000 at the
end of its useful life.
The Piton II costs $350,000, has a seven-year life that will be
depreciated down to zero using straight-line method. Piton II will
only save the company $75,000 per year (before taxes) but will have
a salvage value of $35,000 at the end of its life. If your tax rate
is 23 percent and your discount rate is 9 percent, compute the NPV
and IRR for both machines. Which do you prefer? If Piton 1 required
an immediate investment of $25,000 of working capital, would your
answer change?