FINANCE
Holliday manufacturing is considering the replacement of an existing machine. The new machine cost $1.2 million and requires installation cost of $150,000. The existing machine can be sold currently for $185,000 before taxes. It is 2 years old, cost $800,000 new, and has a $384,000 book value and a remaining useful life of 5 years. It was being depreciated under MACRS using a 5-year recovery period and therefore has the final 4 years of depreciation remaining. If it is held for 5 more years, the new machine should reduce operating cost by $350,000 per year. The new machine will be depreciated under MACRS using 5- year recovery period. The new machine can be sold for $200,000 net of removal and cleanup cost at the end of 5 years. An increased investment in net working capital if $25,000 will be needed to support operation if the new machine us acquired. Assume that the firm has adequate operating income against which to deduct any loss experience on the sale if the existing machine. The firm has a 9% cost of capital and is subject to a 40% tax rate.
A. Develop the relevant cash flow needed to analyze the proposed replacement.
B. Determine the net present valve (NPV) of the proposal
C. Determine the internal rate of return (IRR) of the proposal
D. Make a recommendation to accept it reject the replacement proposal, and justify your answer.
E. What is the highest cost of capital that the firm could have and still accept the proposal? Explain?
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