Jack's Machine Shop is trying to decide if it should replace its old lathe with a new computerized machine. The old machine, while completely depreciated, still has a current market value of $3500. The new machine will cost $30,000 and have a life of ten years with no remaining value. The new machine will be depreciated on a straight-line basis assuming no salvage value. The new machine will increase annual revenues by $12,000 and increase annual fixed expenses by $5000, not including depreciation.
a. What is the after-tax net cash flow realized by replacing the old machine with the new machine? Assume a 40% tax rate for all income, including the capital gains on the sale of the old machine.
b. What is the IRR of this project?
c. At a cost of capital of 10%, what is the net present value of this cash flow stream?
d. At a cost of capital of 10%, is this project worthwhile?