Please show detailed formulas AND calculations and explain rationale for each answer.
You have been asked by the firm to evaluate the acquisition of a special-purpose machine. The machine costs $600,000. The machine will be depreciated to a zero-book value on a straight-line basis over 4 years. It will be sold at the end of year 4 for $200,000. The machine will increase initial net working capital by $20,000 for parts (none of this will be recovered). The machine will generate an additional $100,000 per year in sales (due to faster production) and will save the firm $250,000 per year in costs (enhanced efficiency). Tax rate is 40%. Cost of capital is 12%.
A Calculate the net present value.
B. Calculate internal rate of return and profitability index.
C. Use NPV to decide whether to acquire the machine. Explain your decision.
D. Now suppose the machine falls into the 3-year MACRS class. All other assumptions are the same. MACRS depreciation rates in years 1, 2, 3 and 4 are 33.33%, 44.45%, 14.81% and 7.41% respectively. Find the NPV and compare it to the original NPV.