Question: (a) Consider a machine in use that can be sold for $3,500 or that could be used for another 3 years with no salvage value at the end. A new machine can be bought at a total cost of $ 1 8,000. It also has an estimated life of 3 years and no salvage value. If the new machine is purchased, operating savings are expected to be $ 12,000 in year 1 and $6,000 per year in years 2 and 3. The corporate tax rate is 40 percent, the maximum rate for capital cost allowances is 30 percent, and the discount rate is 11 percent. Calculate the internal rate of return and net present value for the new machine.
(b) Recompute the internal rate of return and the net present value assuming that the salvage value of the new machine at the end of the 3rd year is estimated at $ 1,000.