Question

To cope with the current factory closures GM would like to replace an old parts producing machine with a 3d printer. The old machine was bought 10 years ago and at that point was expected last for 20 years. Initially $1,000 was spent bringing and installing it. The new printer would cost $100,000. The old machine cost $40,000 and had been expected to have a salvage value of $0 (zero) in twenty years. The new printer is expected to last for 10 years at which point it will have a salvage value of $50,000. The old machine could be currently sold for $3,000. GM also has other machines for the same purpose in the same asset pool. The machines fall in an asset class with an annual 5% depreciation or CCA rate. Due to its increased speed of production GM would be able to sell more parts and increase annual pretax revenues by $30,000. There would be an additional cost of $10,000 incurred annually for consumables and to maintain the printer.

Determine the NPV and IRR for this opportunity and make a recommendation.

Show work written out.

Explain how you would use solver or goalseek to find this value once you have setup all the data in a spreadsheet. We assume there are no changes in working capital required. The weighted average cost of capital is 12% and the tax rate is 40%. Use 10% as the second rate if you need a lower rate for interpolation by hand and use 15% if you need a higher rate. All working steps must be clearly shown.

Answer 1

Year	Net	Factor	NPV at 12%
	Cash Flow	12 %
0	-97000.00	1.00	-97000.00
1	11000.00	0.89	9821.43
2	11000.00	0.80	8769.13
3	11000.00	0.71	7829.58
4	11000.00	0.64	6990.70
5	11000.00	0.57	6241.70
6	11000.00	0.51	5572.94
7	11000.00	0.45	4975.84
8	11000.00	0.40	4442.72
9	11000.00	0.36	3966.71
10	61000.00	0.32	19640.37
Total	63000.00	6.65022	-18748.88
IRR	7.99%

GM should not go for new proposal. SInce NPV is negative at 12% discounting rate and IRR is less than 12 % and even 10 %.

Point of reference:

1. Incremental Inflows will be 30000-10000-5000=15000
2. Post Tax Incremental Inflows will be 15000-40%*15000=9000
3. Tax Savings on Depreciation will be 5000*40%=2000 This will be added back to 9000
4. Year 0 = 100000-3000=97000 of cash outflows
5. Year 10= Salvage Value of 50000+ 11000=61000