Question
In: Finance
Although the Chen Company's milling machine is old, it is still in relatively good working order...
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 $112,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,900 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 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 SHOULD or SHOULDN'T purchase the new machine.
Solutions
Expert Solution
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | ||
| Cost of new machine | -112000 | ||||||||||||
| =Initial Investment outlay | -112000 | ||||||||||||
| 100.00% | |||||||||||||
| =after tax operating cash flow | 19900 | 19900 | 19900 | 19900 | 19900 | 19900 | 19900 | 19900 | 19900 | 19900 | |||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | |||||||||||
| =Terminal year after tax cash flows | 0 | ||||||||||||
| Total Cash flow for the period | -112000 | 19900 | 19900 | 19900 | 19900 | 19900 | 19900 | 19900 | 19900 | 19900 | 19900 | ||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.1 | 1.21 | 1.331 | 1.4641 | 1.61051 | 1.771561 | 1.9487171 | 2.1435888 | 2.357948 | 2.593742 | |
| Discounted CF= | Cashflow/discount factor | -112000 | 18090.90909 | 16446.281 | 14951.165 | 13591.968 | 12356.334 | 11233.031 | 10211.84655 | 9283.4969 | 8439.543 | 7672.311 | |
| NPV= | Sum of discounted CF= | 10276.8854 | |||||||||||
Buy new machine as NPV is positive
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