Equipment replacement, NPV, IRR, and payback (CMA) Garco is considering replacing an old machine that is currently being used. The old machine is fully depreciated, but it can be used for another 5 years, at which time it would have no terminal value. Garco can sell the old machine for $60,000 on the date that the new machine is purchased. If the purchase occurs, the new machine will be acquired for a cash payment of $1 million. Because of the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated during its useful life of 5 years. The new machine is not expected to have any terminal value.
REQUIRED:
1. Garco requires investments to earn a 12% return. What is the net present value for replacing the old machine with the new machine?
2. What is the internal rate of return to replace the old machine?
3. What is the payback period for the new machine?
