Question

Please show excel steps.

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 $42,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $8,400 per year. It would have zero salvage value at the end of its life. The Project cost of capital is 11%, and its marginal tax rate is 35%. Should Chen buy the new machine?

Answer 1

To make a decision regarding the buying of machine we need to find out the NPV of the project.

NPV = Present value of cash inflows - Present value of cash outflows

There is only on ecash outflow ie Cost of machine = 42000

labor savings & depreciation tax savings = after tax cash flows = 8400 (A)

Now the depreciation is not considered sepeartely as depreciation tax savingsa re already covered in cash inflows.

Also tax is not provided over the cash flows as the cashflows given are after tax cash flows

Present value of cash inflows = 8400 * PVIFA (r,n) = 8400 * PVIFA ( 11%,10)

=8400 * { [ 1 - (1+r)^-n] / r }

= 8400* { [ 1 - 1.11^-10] / 0.11 }

= 8400 * 5.89

= 49476 (B)

NPV = B - A = 49473 - 42000 = $7,473