Question

FIN 650 - Problem 11-04 (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 $102,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,400 per year. It would have zero salvage value at the end of its life. The project cost of capital is 9%, and its marginal tax rate is 25%. 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 Should or Shouldn't> purchase the new machine.

Answer 1

Calculation of NPV of the Project
Year	Cash Flows	Discount Factor @9%	Discounted Caseflows
A	B	C=1/(1+9%)^A	D = B*C
0	-102000	1	-102000
1	18400	0.917431193	16880.73394
2	18400	0.841679993	15486.91188
3	18400	0.77218348	14208.17603
4	18400	0.708425211	13035.02388
5	18400	0.649931386	11958.73751
6	18400	0.596267327	10971.31881
7	18400	0.547034245	10065.43011
8	18400	0.50186628	9234.339546
9	18400	0.46042778	8471.871143
10	18400	0.422410807	7772.358847
Net present Value	16084.9017
Therefore, NPV of the Project is $16,084.90
Chen Should purchase the new machine since NPV>0