The CSI firm is considering replacing an older inefficient industrial printer. The firm has narrowed the search down to two machines; Machine A, and Machine B. A summary of the three machines appears below:
Purchased Machine
cost Installation cost Depreciation Remaining life Current market value Terminal market value
Old machine 3 years ago 380,000 $20,000 MACRS 5 year 5 years $420,000 $150,000
Machine A $830,000 $40,000 MACRS 5 year $400,000
Machine B $640,000 $20,000 MACRS 5 year $330,000
If the firm decides to go with machine A the follow changes will occur in the firm's current accounts:
Cash will increase by $25,000
Acct Rec will increase by $120,000
Inventories will decrease by $20,000
Accts payable will increase by $35,000
If the firm decides to go with Machine B they will not incur any changes in net working capital.
The terminal values for each machine as represented above reflect the pretax value at the end of its useful life, (five years).
EBIT for the old machine:
Year EBIT
1 $120,000
2 $120,000
3 $120,000
4 $120,000
5 $120,000
EBIT for machine A
Year EBIT
1 $250,000
2 $270,000
3 $300,000
4 $330,000
5 $370,000
EBIT for machine B
Year EBIT
1 $210,000
2 $210,000
3 $210,000
4 $210,000
5 $210,000
Calculate the following:
The NPV of the incremental cash flows for both machine A, and Machine B
The IRR of the incremental Cash flows for Both Machine A and machine B
The MIRR of the incremental Cash flows for both Machine A and machine B
The Payback period associated with the purchase of both machine A and machine B
Which machine would you recommend and why?
The firm is subjected to a 40% tax rate, and the firm's cost of capital is 14%