Gemco, Inc. is currently considering the replacement of an existing machine. The new machine costs $1.3 million and requires installation costs of $10,000. The existing machine can be sold currently for $410,000 before taxes. It is three years old, had a cost of $880,000 new, and has remaining useful life of 5 years.
The old machine was being depreciated as 5 year class asset, using the MACRS Depreciation Schedule (20%, 32%, 20%,, 11%, 6%) in years 1 thru 6. If held until the end of its remaining useful life, the old machine will have a market value of $11,000 before tax.
Over its five year use by Gemco, the new machine will increase revenues and decrease cash operating costs (excluding depreciation), respectively, by $230,000 and $120,000 per year before tax. The new machine will depreciated as a 5-year class asset using the MACRS Depreciation Schedule. The new machine can be sold for $180,000 net of removal costs at the end of the five years before taxes.
An increased investment in in net working capital of $25,000 will be needed at time 0 to support operations, if the new machine acquired. Gemco, Inc. will continue to be the 34% marginal tax bracket and the increase in net working capital will be fully recovered when the project is terminated. The firm has a 13.5% cost of capital.
What are the incremental net operating cash flows in each of the years of replacement?
What is the incremental termination cash flow of the replacement?
What is the NPV, IRR, MIRR?