A company is planning to replace a machine with a new, better performing one. The figures for the investment are as follows:
· Purchase of new machine:
- cost € 2m;
· useful life 5 years, residual value nil;
· linear depreciation over 5 years;
· savings on charges € 0.8m per year.
· Sale of second-hand machine:
· purchase cost € 1.5m (machine bought the previous year);
· linear depreciation over 5 years (residual value is nil);
· net book value today € 1.2m;
· potential sale price € 1.0m.
If the tax rate on profits and capital gains/losses is 40%, what is the ‘‘value” for the company of the new machine the company is planning to buy (this company’s required rate of return is 12%)?
Calculate the net present value and the internal rate of return of the planned
investment.