Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires too much energy to run. The industrial size oven will cost $1,200,000. The oven will be depreciated on a straight-line basis over its six year useful life. The old oven cost the company $800,000 just four years ago. The old oven is being depreciated on a straight-line basis over its expected ten year useful life. (That is, the old oven is expected to to last 6 more years if it is not replaced now.) Due to changes in the fuel costs, the old oven may only be sold today for $100,000. The Expenses will also decrease by $50,000 per year due to the more energy efficient design of the new oven. The premium pie company is in the 40% marginal tax bracket and has a required rate of return of 10%
Calculate the net present value and internal rate of return of replacing the existing machine.