Question:
A company is considering the purchase of a new machine to replace an existing one. The old one was purchased 5 years ago at a cost of 20K and is being depreciated on a straight line basis to a zero salvage value over 10 year life. The current market value of the old machine is 14K. The new machine falls into the MACRS 5 year class has an estimated life of 5 years, it costs 30K and the complany plans to sell the machine at the end of the 5th year for 1K.
The new machine is expect to generate before-tax cash saving of 3K per year.
The company's tax rate is 40%. What is the IRR of the proposed project?