a company is planning to replace a machine with a new better performing one the figu 539632

A company is planning to replace a machine with a new, better performing one. The figures for the investment are as follows:

· Purchase of new machine:

• cost € 2m;

· useful life 5 years, residual value nil;

· linear depreciation over 5 years;

· savings on charges € 0.8m per year.

· Sale of second-hand machine:

· purchase cost € 1.5m (machine bought the previous year);

· linear depreciation over 5 years (residual value is nil);

· net book value today € 1.2m;

· potential sale price € 1.0m.

If the tax rate on profits and capital gains/losses is 40%, what is the ‘‘value” for the company of the new machine the company is planning to buy (this company’s required rate of return is 12%)?

Calculate the net present value and the internal rate of return of the planned

investment.