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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

jeff jeffy answered 3 months ago
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