Treads Corporation is considering the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to replace the old machine, Picco Company has offered to purchase the old machine for $60,000. The old machine would have no salvage value in five years.
The new machine would be acquired from Hillcrest Industries for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated.
Treads Corporation uses a discount rate of 12%. (Ignore income taxes in this problem.)

- The internal rate of return of the project is closest to which of the following?
A) 12%.
B) 16%.
C) 18%.
D) 20%.

Question

Treads Corporation is considering the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to replace the old machine, Picco Company has offered to purchase the old machine for $60,000. The old machine would have no salvage value in five years.
The new machine would be acquired from Hillcrest Industries for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated.
Treads Corporation uses a discount rate of 12%. (Ignore income taxes in this problem.)

- The internal rate of return of the project is closest to which of the following?
A) 12%.
B) 16%.
C) 18%.
D) 20%.

Quizplus · Accepted Answer

Without more information, it is difficult to determine the exact internal rate of return, but the closest option is C, 18%.

Treads Corporation Is Considering the Replacement of an Old Machine