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 $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 value at the end of its life. The project cost of capital is 12%, 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.

Answer 1

Year	Cash inflow / (cash outflow)	Cost of capital @12%	PV of cash flow
0	-1,20,000.00	1.00000	-1,20,000.00
1	19,300.00	0.89286	17,232.14
2	19,300.00	0.79719	15,385.84
3	19,300.00	0.71178	13,737.36
4	19,300.00	0.63552	12,265.50
5	19,300.00	0.56743	10,951.34
6	19,300.00	0.50663	9,777.98
7	19,300.00	0.45235	8,730.34
8	19,300.00	0.40388	7,794.95
9	19,300.00	0.36061	6,959.77
10	19,300.00	0.32197	6,214.08
		NPV	-10,950.70

Since the NPV is negative, Chen Company should NOT buy the new machine