a machine currently in use was originally purchased five years ago.

A new machine can be purchased for $90,000 p expected to be $70,000 per year wit hthe old machine. Revenue with the new machine is expected to be $75,000 in years 2-3, 4 percent per year for years 4-6, and 5 percent per year for years 7-8. The firms tax rate is 40 percent and CALCULATE PAYBACKb. CALCULATE NET PRESENT VALUE

Discount Rate

12%

Year Initial Cost a) Payback Schedule: Year 1 2 0 $105,000 1 $75,000

Unrecovered Investment Cash Inflow $105,000 $75,000 $30,000 $77,250

Since in year 2, only $30,000 need to be recovered while cash inflow is $77,250, the investment would be recovered in a fraction of year 2. To calculate this fraction, we divide $30,000 by $77,250 = 0.388. Therefore payback = 1.4 years

b) NPV

$309,313.62

e years ago. A new machine can be purchased for $90,000 plus a $15,000 delivery and installation charge. Revenue is Revenue with the new machine is expected to be $75,000 in year 1 and increase at the rate of 3 percent per year for nt per year for years 7-8. The firms tax rate is 40 percent and the risk adjusted discount rate is 12 percenta. SENT VALUE

Year 2 $77,250 Ending Unrecovered Investment $30,000 $47,250 3 $79,568 4 $82,750 5 $86,060 6 $89,503 7 $93,978 8 $98,677

e cash inflow is $77,250, the investment e this fraction, we divide $30,000 by $77,250

arge. Revenue is t per year for nta.