PV of the $15k savings, use Present Value ordinary annuity "PVoa"...
PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]
= 15,000[(1 - (1 / 1.10^10)) / 0.10]
= 15k[(1 - 0.38554) / 0.10]
= 15k[6.14457]
= $92,168.51 (rounded)
NPV = (84,000) + 92,168.51 = $8,168.51
IRR (use a financial calculator or spreadsheet) = 12.21869%
Payback period: 84,000 / 15,000 = 5.6 years
Tony Soprano and Paulie Walnuts of Buddabing Manufacturing are considering
the purchase of a new piece of equipment which will cost $100,000 in cash. The
old piece of equipment it will replace originally cost $84,000 and can now be sold
for $16,000. Annual cash savings of $15,000 are expected for (10) ten years.
a) Compute the NPV (net present value) of the replacement alternative,
assuming that the desired rate of return is 10%.
b) What will be the IRR (internal rate of return)?
c) How long is the payback period on the incremental investment?
