Question

Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $104,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,900 per year. It would have zero salvage value at the end of its life. The Project cost of capital is 12%, and its marginal tax rate is 35%. Should Chen buy the new machine? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.

NPV: $  

Chen -Select-shouldshouldn'tItem 2 purchase the new machine.

Answer 1

Calculation of NPV of the Project
Year	Cash Flow	Discount Factor@12%	Discounted Cash Flows
A	B	C = 1/(1+12%)^A	D = B*C
0	-104000	1	-104000
1	18900	0.892857143	16875
2	18900	0.797193878	15066.96429
3	18900	0.711780248	13452.64668
4	18900	0.635518078	12011.29168
5	18900	0.567426856	10724.36757
6	18900	0.506631121	9575.32819
7	18900	0.452349215	8549.40017
8	18900	0.403883228	7633.393009
9	18900	0.360610025	6815.529472
10	18900	0.321973237	6085.294172
Net Present Value	2789.215237
Net Present value of the Project is $2,789.22
Therefore, Chen should purchase the machine