The Winky Corporation, maker of electronic components, is considering

QUESTION

The Winky Corporation, maker of electronic components, is considering
replacing a hand-operated machine used in the manufacture of electronic
components with a new fully automated machine. Find the Payback Periodthe Net Present Value and the Internal Rate of Return of the proposalxisting: One full-time machine operator $20,000 per year
Cost of maintenance 5,000 per year
Cost of defects 5,000 per year
Original cost of old machine 30,000
Expected life 10 years
Age 5 years
Expected salvage value $ 0
Depreciation 3,000 per year
Current Book Value 15,000
Marginal tax rate 34%

Proposed: No operator needed Cost of machine $55,000
Installation fee 5,000
Cost of maintenance 6,000 per year
Cost of defects 2,000 per year
Expected life 5 years
Salvage value $ 0
Annual net of tax cash operating cost of old machine = (Operator cost + Maintenance cost + Cost of defects)*(1-T) “ (Depreciation)*(T) = (20000 + 5000 + 5000)*(1-.34) “ (3000)*(.34) = 18780 Annual net of tax cash operating cost of new machine = (Maintenance cost + Cost of defects)*(1-T) “ (Depreciation)*(T) = (6000+2000)*(1-.34)-12000*(.34) = 1200 Annual cost savings = 18780 “ 1200 = 17580¦

ay back period = Cost / Annual cost savings = 60000 / 17580 = 3.41 Years NPV = CF0 + A*(1-(1+i)^-n)/i Assuming rate of interest as 10% = -60000 + 17580*(1-(1+.10)^-5)/.10 = 6642 IRR: CF0 + A*(1-(1+i)^-n)/i = 0 -60000 + 17580*(1-(1+i)^-5)/i = 0 i (IRR) = 14.24%

ANSWER:

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