1.

Calculate IRR(s) and graph NPV profile for the project with the following cash flows:

Year Cash Flows

0 −$ 1,008
1 5,724
2 −12,140
3 11,400
4 −4,000
When this project should be accepted? (You should use spreadsheets for calculations)

What is the MIRR of the project if required rate is 20%?

2. ABCD Company considers the replacement of two machines that are three years old with a new,
more efficient machine. The two old machines could be sold currently for a total of $70,000 in the
secondary market, and they would have a 0 final salvage value if held to the end of their remaining
useful life. Their original depreciable basis totaled $300,000. They have a depreciated tax book value
of $86,400, and a remaining useful life of eight years. MACRS depreciation is used on these
machines, and they are five-year property class assets (see below). The new machine can be
purchased and installed for $520,000. It has a useful life of eight years, at the end of which a salvage
value of $40,000 is expected. The machine falls into the five-year property class for accelerated cost
recovery (depreciation) purposes. Owing to its greater efficiency, the new machine is expected to
result in incremental annual operating savings of $100,000. The company’s corporate tax rate is 30
percent, and if a loss occurs in any year on the project, it is assumed that the company can offset the
loss against other company income.
What are the incremental cash inflows over the eight years, and what is the incremental cash
outflow at time 0?

MACRS depreciation rates

Recovery
3-Year 5-Year
Year
1 33.33 20
2 44.45 32
3 14.81 19.2
4 7.41 11.52
5 11.52
6 5.76