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Mirror Ball Ranch is considering the purchase of a new excavator for $200,000. The new excavator has a useful life of 6 years, and will be depreciated under the MACRS method.
The new machine is expected to save $60,000 per year in reduced fuel and maintenance expenses. Mirror Ball believes the new asset will be sold for $25,000 after five years, although they plan to use a $0 salvage value for tax purposes. The investment would require an initial investment in working capital of $20,000 at the start of the project. Mirror Ball is in the 30% tax bracket and has a 15% cost of capital, but Mirror Ball decides to finance this investment with long term debt that can be issued at a rate of 10 percent.
REQUIRED:
a. IN GOOD FORM show all relevant cash flows for:
1. the purchase of the new machine 2. the annual flows over the life of the new machine 3. the end of the life of the new machine
b. What is the net present value of the new investment?c. Calculate the IRR of this new investment.d. What is the payback period of this new investment.
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