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In: Finance
Problem 11-04 Replacement Analysis Although the Chen Company's milling machine is old, it is still in...
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 $41,000 delivered and installed, would also
last for 10 years and would produce after-tax cash flows (labor
savings and depreciation tax savings) of $8,900 per year. It would
have zero salvage value at the end of its life. The Project cost of
capital is 12%, and its marginal tax rate is 35%.
Should Chen buy the new machine?
Solutions
Expert Solution
| Ref | Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | |
| a | Operating cash flow | $ 8,900.00 | $ 8,900.00 | $ 8,900.00 | $ 8,900.00 | $ 8,900.00 | $ 8,900.00 | $ 8,900.00 | $ 8,900.00 | $ 8,900.00 | $ 8,900.00 | |
| b | Depreciation | $ (4,100.00) | $ (4,100.00) | $ (4,100.00) | $ (4,100.00) | $ (4,100.00) | $ (4,100.00) | $ (4,100.00) | $ (4,100.00) | $ (4,100.00) | $ (4,100.00) | |
| c=a-b | Profit before tax | $ 4,800.00 | $ 4,800.00 | $ 4,800.00 | $ 4,800.00 | $ 4,800.00 | $ 4,800.00 | $ 4,800.00 | $ 4,800.00 | $ 4,800.00 | $ 4,800.00 | |
| Profit after tax | $ 3,120.00 | $ 3,120.00 | $ 3,120.00 | $ 3,120.00 | $ 3,120.00 | $ 3,120.00 | $ 3,120.00 | $ 3,120.00 | $ 3,120.00 | $ 3,120.00 | ||
| Add depreciation | $ 4,100.00 | $ 4,100.00 | $ 4,100.00 | $ 4,100.00 | $ 4,100.00 | $ 4,100.00 | $ 4,100.00 | $ 4,100.00 | $ 4,100.00 | $ 4,100.00 | ||
| Add: salvage value | $ - | $ - | $ - | $ - | $ - | $ - | $ - | |||||
| Add: working capital | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - | $ - | ||
| Cash flow after tax | $ 7,220.00 | $ 7,220.00 | $ 7,220.00 | $ 7,220.00 | $ 7,220.00 | $ 7,220.00 | $ 7,220.00 | $ 7,220.00 | $ 7,220.00 | $ 7,220.00 | ||
| d | Present value factor@ 12.0% | 0.892857143 | 0.797193878 | 0.711780248 | 0.635518078 | 0.567426856 | 0.506631121 | 0.452349215 | 0.403883228 | 0.360610025 | 0.321973237 | |
| e=c*d | Present value of annual cashflows | $ 6,446.43 | $ 5,755.74 | $ 5,139.05 | $ 4,588.44 | $ 4,096.82 | $ 3,657.88 | $ 3,265.96 | $ 2,916.04 | $ 2,603.60 | $ 2,324.65 | |
| Total present value of annual cash inflows | $ 40,794.61 | |||||||||||
| Investment: | ||||||||||||
| Equipment | $ (41,000.00) | |||||||||||
| Working capital | $ - | |||||||||||
| NPV | $ (205.39) |
NPV is negative. Machine should not be purchased.
jeff jeffy answered 1 year agoRelated Solutions
Problem 11-04 Replacement Analysis Although the Chen Company's milling machine is old, it is still in...
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 $41,000 delivered and installed, would also
last for 10 years and would produce after-tax cash flows (labor
savings and depreciation tax savings) of $9,000 per year. It would
have...
Replacement Analysis Although the Chen Company's milling machine is old, it is still in relatively good...
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 $120,000 delivered and
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per year. It would have zero salvage...
Replacement Analysis Although the Chen Company's milling machine is old, it is still in relatively good...
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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 $120,000 delivered and installed, would also
last for 10 years and would produce after-tax cash flows (labor
savings and depreciation tax savings) of $18,900 per year. It would
have zero salvage...
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 $41,000 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...
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 $38,000 delivered and installed,
would also last for 10 years and would produce after-tax cash flows
(labor savings and depreciation tax savings) of $8,600 per year. It
would have zero salvage value at...
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...
Replacement AnalysisAlthough the Chen Company's milling machine is old, it is stillin relatively good...
Replacement AnalysisAlthough 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...
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