Blazer Video Production is a producer of commercials andcorporate information videos. They have a high-tech studio withmultiple high-intensity lights. Blazer is considering switching outthe lights for more energy efficient LED lights, which do notgenerate the tremendous amounts of heat that the current lights putout and do not require frequent bulb replacements. The new lightswould cost $10,000 and would be depreciated straight-line overtheir five-year useful life and are expected to have no salvagevalue. The existing lights were purchased for $8,000 five years agoand were being depreciated straight-line over their ten-year usefullife and were not expected to have any salvage value. The oldlights had a longer life expectancy because of the frequent bulbreplacement. The existing lights could currently be sold for$4,000. The lights are not expected to change revenues at all, butwill save $2,000 per year in electricity and bulbs. The firm’s taxrate is 25% and the required rate of return is 10%. Calculate theIRR. Should Blazer purchase the replacement lights? Hint: Rememberto include the difference in annual depreciation in your cashflows.
