Question

Replacement Analysis

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 $114,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,800 per year. It would have zero salvage value at the end of its life. The Project cost of capital is 10%, 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

NPV=PV of Inflows -Initial Outflow

The Outflow here =$114,000

The cash flows =18,800 per year for 10 years

The PVIF for 10 years at 10% can be determined using the formula(1-(1+r)^-n)/r

r is the discount rate here 10% n is the number of years here 10

So (1-(1+.1)^-10)/.10=6.144567106

So the PV of cash flows =18,800*6.144567106=$115,517.8616

So NPV=$115,517.8616-$114,000=$1,517.8616 that's $1,517.86(rounded to the nearest cent)

Yes Chen Should purchase the new machine as the NPV is positive, this implies that it would add value to the firm.