Consider a new line of equipment that will cost $760,000 and will save a company $160,000 in operating expenses for the next ten years. It will not affect sales, but it will result in an increase in Net Working Capital of $60,000.
The new line will replace an old line of equipment that will last for about 5 more years before it could be recycled for $40,000. If sold today, the old equipment is worth $120,000. The old equipment was purchased five years ago for $450,000 and is being depreciated using the MACRS 7-year rates. The new equipment will also be depreciated using the 7-year rates. The company’s marginal tax rate is 35% and their cost of capital is 11%.
Calculate the NPV and IRR of this replacement project.