OLD MACHINE

Cost 85,000.00 105,000.00

Life 6.00
Salvage Value 10,000.00
Depreciation 12,500.00
Repair Cost 20,000.00
Market Sale Value 40,000.00
Sales 100,000.00 125,000.00 225,000.00
Expense 50,000.00 65,000.00 115,000.00
Rate

Solution
Net Cash Outlay
Cost 85,000.00
Repair Cost 20,000.00
Release of working capital

Net Cash Outlay 105,000.00

Net Cash Inflow

Year 1 Year 2 Year 3 Year 4
Sales 100,000.00 100,000.00 100,000.00 100,000.00
Expense 50,000.00 50,000.00 50,000.00 50,000.00
Depreciation 12,500.00 12,500.00 12,500.00 12,500.00
Net income before tax 37,500.00 37,500.00 37,500.00 37,500.00
Income tax 9,375.00 9,375.00 9,375.00 9,375.00
Net income after tax 28,125.00 28,125.00 28,125.00 28,125.00
Depreciation 12,500.00 12,500.00 12,500.00 12,500.00
Net Cash inflows 40,625.00 40,625.00 40,625.00 40,625.00

Terminal Cash flow

Proceeds from sale of asset 40,000.00

Tax effect on gain on sale (7,500.00)

Terminal cash flow 32,500.00

1. Cash payback period

Net Cash Outlay 105,000.00 = 2.58 years
Net Cash inflows 40,625.00

2. Accounting rate of return

Net income before tax 37,500.00 = 36%
Net Cash Outlay 105,000.00

3. Discounted Payback
Year 1 40,625.00 0.885 35,953.13
Year 2 40,625.00 0.783 31,809.38
Year 3 40,625.00 0.693 28,153.13
Year 4 40,625.00 0.612 24,862.50
Year 5 40,625.00 0.543 22,059.38
Year 6 40,625.00 0.480 19,500.00

105,000.00
Less 95,915.63
9,084.38
Divide 24,862.50
0.365
4.38 months
3 years and4 months

4. Net Present Value 

PV of cash inflows - regular  40,625.000 3.998 162,418.75
PV of Terminal Cash flow      32,500.000 0.480 15,600.00
Total PV of cash inflows                                    178,018.75
Net Cash outlays or Investment costs      105,000.00
Net Present Value                                          73,018.75

5. Internal Rate of Return (IRR)

    Approximate IRR 105,000.00 40,625.00 2.58 Between 30%-31%
    Exact IRR 30% 2.643 0.06
31% 2.588 13%
Difference  1% 0.06
Internal Rate of Return 31.05%

6.Modified Internal Rate of Return (MIRR)

Year 1 40,625.00 1.000 40,625.00
Year 2 40,625.00 1.130 45,906.25
Year 3 40,625.00 1.277 51,874.06
Year 4 40,625.00 1.443 58,617.69
Year 5 40,625.00 1.630 66,237.99
Year 6 40,625.00 1.842 74,848.93
Terminal Value 338,109.92
0.31 Between 21%-22%
    Exact MIRR 21% 0.319 0.01
22% 0.303
Difference  1% 0.02
MIRR 21.53%
 NE
Cost 150,000.00
Life 4.00
Salvage Value -
Depreciation 45,000.00
Freight and Installation cost 30,000.00
Market Sale Value 40,000.00
Sales 225,000.00
Expense 115,000.00
Rate 13%

Solution
Net Cash Outlay
Cost 150,000.00
Freight and Installation cost 30,000.00
Release of working capital 20,000.00
Proceeds from sale of old ass (40,000.00)
Tax savings due to loss on sale  (5,000.00)
Avoidable repair cost  (20,000.00)
Avoidable tax savings on repair  5,000.00
Net Cash Outlay 140,000.00

Net Cash Inflow

Year 5 Year 6 Year 1
100,000.00 125,000.00 Sales 225,000.00
50,000.00 50,000.00 Expense 115,000.00
12,500.00 27,500.00 Depreciation 32,500.00
37,500.00 47,500.00 Net income before tax 77,500.00
9,375.00 11,875.00 Income tax 19,375.00
28,125.00 35,625.00 Net income after tax 58,125.00
12,500.00 27,500.00 Depreciation 32,500.00
40,625.00 63,125.00 Net Cash inflows 90,625.00

Terminal Cash flow

Proceeds from sale of asset

Tax effect on gain on sale
Released of working capital 
Terminal cash flow

1. Cash payback period

Net Cash Outlay 140,000.00
Net Cash inflows 90,625.00

2. Accounting rate of return

Net income before tax 77,500.00
 Net Cash Outlay 140,000.00

3. Discounted Payback
Year 1 90,625.00
Year 2 90,625.00
Year 3 90,625.00
Year 4 90,625.00

140,000.00
Less 80,203.13
59,796.88
Divide 70,959.38
0.843
10.11
1 year and 10 months

4. Net Present Value 

PV of cash inflows - regular 
PV of Terminal Cash flow     
Total PV of cash inflows                                   
Net Cash outlays or Investment costs     
Net Present Value                                         

5. Internal Rate of Return (IRR)

ween 30%-31%     Approximate IRR 140,000.00
1/(1+r)^n     Exact IRR 53%
1.00 4 54%
0.613 Difference  1%
Internal Rate of Return 52.88%

6.Modified Internal Rate of Return (MIRR)

2.974
Year 1 90,625.00
Year 2 90,625.00
Year 3 90,625.00
Year 4 90,625.00

Terminal Value
ween 21%-22%
    Exact MIRR 32%
33%
Difference  1%
MIRR 33.11%
 NEW MACHINE
180,000.00

Year 2 Year 3 Year 4

225,000.00 225,000.00 225,000.00
115,000.00 115,000.00 115,000.00
32,500.00 32,500.00 32,500.00
77,500.00 77,500.00 77,500.00
19,375.00 19,375.00 19,375.00
58,125.00 58,125.00 58,125.00
32,500.00 32,500.00 32,500.00
90,625.00 90,625.00 90,625.00

40,000.00
(10,000.00)
20,000.00
50,000.00

= 1.54 years

= 55%
 0.885 80,203.13
0.783 70,959.38
0.693 62,803.13
0.612 55,462.50

months
and 10 months

90,625.000 2.974 269,561.46

50,000.000 0.613 30,665.94
300,227.40
140,000.00
160,227.40

90,625.00 1.54 Between 53%-54%

1.542 (0.00)
1.523
0.02

e of Return (MIRR)
1.000 90,625.00
1.130 102,406.25
1.277 115,719.06
1.443 130,762.54

439,512.85
0.32 Between 33%-32%
0.329 0.01
0.320
0.01
 SUMMARY AND
Old Machine
1. Cash payback period 2.58 years
2. Accounting rate of return 36%
3. Discounted Payback 3 years and4 months
4. Net Present Value  73,018.75
5. Internal Rate of Return (IRR) 31.05%
6.Modified Internal Rate of Return (MIRR) 21.53%
SUMMARY AND DECISION POINTS
New Machine
1.54 years
55%
1 year and 10 months
160,227.40
52.88%
33.11%
MARY AND DECISION POINTS
Decision
Replace the old asset and accept the acquisition of new asset because of its shorter payback period
Replace the old asset and accept the acquisition of new asset.
Replace the old asset and accept the acquisition of new asset because of its shorter payback period
Replace the old asset and accept the acquisition of new asset because of higher NPV
Replace the old asset and accept the acquisition of new asset because of higher IRR
Replace the old asset and accept the acquisition of new asset because of higher MIRR