TRIAL AND ERROR, INC.

TRIAL AND ERROR, INC. A MAKER OF PRECISION MACHINE TOOLS, IS
CONSIDERING THE REPLACEMENT OF A METAL LATHE PURCHASED 5 YEARS AGO FOR
 $60,000. THE MACHINE IS BEING DEPRECIATED TO A ZERO SALVAGE VALUE
OVER ITS 15-YEAR LIFE, USING THE STRAIGHT LINE METHOD. THE MACHINE
UNDER CONSIDERATION WILL COST $85,000, WILL HAVE A 10-YEAR LIFE, AND
WILL HAVE A SALVAGE VALUE OF $5,000. THE MARKET VALUE OF THE EXISTING
MACHINE IS $50,000. THE FIRM?S TAX RATE IS 45%. THE NEW MACHINE IS
EXPECTED TO REDUCE COSTS BY $2,000 PER YEAR AND INCREASE REVENUE BY
$4,000 PER YEAR OVER ITS 10-YEAR LIFE. THE COMPANY?S REQUIRED RATE OF
RETURN IS 12%. BASED UPON THE FOREGOING, CALCULATE THE:

A)	NET OUTLAY (INVESTMENT)
B)	INCREMENTAL CASH INFLOWS FOR THE REPLACEMENT DECISION
C)	NPV, IRR, PAYBACK 

Please use excel file..

Stockman9 --

Most financial analyses use operating margins or gross margins to
calculate returns and cash flow.  However, here we're required to do
the analysis on the basis of the deltas or changes in cash flows. 
Perhaps the company should be named DELTA, INC.

There are several assumptions necessary to this case:
1.  taxes get paid at year-end (as opposed to a six-month convention
used in MACRS-type depreciation cases)
2.  taxes due immediately on recapture of depreciation on old lathe
3.  we'll straightline the depreciation to zero (as with the old
lathe), as opposed to adjusting depreciation to a basis of $80,000
because of the adjusted salvage value

You'll find the entire analysis here (note that the Excel file name is
case-sensitive on this server):
http://www.mooneyevents.com/Trial.xls

The payback period is slightly above 4 years; the NPV is $54,789 and
the IRR is 21.0%

The payback and NPV analyses are pretty clear.  The Internal Rate of
Return analysis uses Excel's IRR function, which requires a negative
(or investment) followed by periods of return -- assumed by Excel to
be yearly returns.

If any portion of this is unclear, please request a clarification
before rating this Google Answer.

Best regards,

Omnivorous-GA