A worldwide cosmetic company can upgrade the quality of one of its products by purchasing new equipment at a cost of k240,000. The new equipment would replace old equipment that has a current market value of k80,000. The old equipment originally cost k150,000 three years ago and is been depreciated over it’s 15 year life on a straight line basis to zero salvage value. New equipment has an expected life of 12 years . It’s salvage value is estimated at k30,000. By upgrading the quality of this product, the company would be able to increase sales price. As a result, the operating income before tax will increase by k10,000 per year over its 12 year life. The company’s tax rate is 40% and it’s cost of capital after tax is 15%. Compute the Net present value and the internal rate of return for the investment.

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A worldwide cosmetic company can upgrade the quality of one of its products by purchasing new equipment at a cost of k240,000. The new equipment would replace old equipment that has a current market value of k80,000. The old equipment originally cost k150,000 three years ago and is been depreciated over it’s 15 year life on a straight line basis to zero salvage value. New equipment has an expected life of 12 years . It’s salvage value is estimated at k30,000. By upgrading the quality of this product, the company would be able to increase sales price. As a result, the operating income before tax will increase by k10,000 per year over its 12 year life. The company’s tax rate is 40% and it’s cost of capital after tax is 15%. Compute the Net present value and the internal rate of return for the investment.

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