6. You are considering replacing the plastic extrusion machinethat create basic moldings of the outdoor pool furniture yourcompany produces. The current extrusion machine was purchased twoyears ago for $240,000 and is being depreciated on the straightline basis over 5 years towards a zero salage value. Although theold machine is anticipated to have a salvage value of $40,000 threeyears from now, it can be sold today for $150,000. The new machinecosts $400,000 and will be depreciated on a straightline basistoward a zero-salvage value over a 5-year period. At the end ofthree years, you expected to be able to sell it for and $50,000.You have estimated that the more modern form of the furniture willresult in sales increasing of $220,000 per year. Manufacturingcosts are anticipated to increase $120,000 per year. The firm is inthe 40% tax bracket.
a. What are the net of free cash flow for each year?
b. Assume the answer of part a is as follow:
Year 0 Year 1 Year 2 Year 3
Net Cash Flow $(275,000) $115,000 $140,000 110,000
What is the IRR for this project?
