Problem:
UniTech Inc. is considering purchasing a new piece of machinery. The old machine, which was purchased 3 years ago for $5 million, has been depreciated straight-line over 5 years to a salvage value of $0. The old machine can currently be sold for $2 million. The new machine, which costs $10 million, will be depreciated over 5 years to a salvage value of $2 million. Revenues from the new machine are expected to be $2.5 million in year 1 and to then grow at a rate of 5% annually. Variable costs are 40% of each year's revenue, and fixed costs are $500,000 annually. Working capital is 10% of next year's revenue.
Required:
Question: Assuming the firm has a 35% income tax and 10% cost of capital, what is the NPV of buying the new machine?
Note: Please show guided help with steps and answer.