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 $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 $18,700 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 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.

1. NPV: $ ____

2. Chen ____ [A. should; B. shouldn't] purchase the new machine.

Answer 1

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$104,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 11%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 11% cost of capital is $6,128.64.

Since the machine generates a positive net present value, Chen should purchase the new machine.