Tech Engineering Company Is Considering the Purchase of a New

question 67

Multiple Choice

Tech Engineering Company is considering the purchase of a new machine to replace an existing one.The old machine was purchased 5 years ago at a cost of R20,000, and it is being depreciated on a straight line basis to a zero salvage value over a 10-year life.The current market value of the old machine is R14,000.The new machine, which falls into the MACRS 5-year class, has an estimated life of 5 years, it costs R30,000, and Tech plans to sell the machine at the end of the 5th year for R1,000.The new machine is expected to generate before-tax cash savings of R3,000 per year.The company's tax rate is 40 percent.What is the IRR of the proposed project?

• A) 4.1%
• B) 2.2%
• C) 0.0%
• D) -1.5%
• E) -3.3%

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Definitions:

Operating Activity

Activities that constitute the primary or main activities of an organization, such as sales or services.

Investment In Subsidiary

The purchase of shares or interests in a subsidiary company by a parent company to obtain control or significant influence over the subsidiary's management and operations.

Book Value

The net value of an asset as recorded on the balance sheet, calculated as the asset's cost minus accumulated depreciation.

Affiliate's Debt Instrument

A financial security issued by an affiliate entity, representing a loan made by investors to the affiliate.