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 the end of its life. The Project cost of capital is 10%, and its marginal tax rate is 35%. Should Chen buy the new machine?

Yes or no

Expert Solution

since NPV is positive Replace the old machinery with new machinery

*Tax rate is not useful in this problem because cash flow are given with after tax effect

Please comment if you face any difficulty and please dont forget to upvote

jeff jeffy answered 1 year ago

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 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 installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,300 per year. It would have zero salvage...

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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Although the Chen Company's milling machine is old, it is still in relatively good working order...

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