Question

Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $225,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $95,000 per year; and Machine 360-6, which has a cost of $375,000, a 6-year life, and after-tax cash flows of $104,500 per year. Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines.

1. Assume that Filkins' cost of capital is 10%. Calculate the two projects' NPVs. Round your answers to the nearest cent.
   
   Machine 190-3    $ ____
   
   Machine 360-6    $ ____
   
   Should the firm replace its old knitting machine, and, if so, which new machine should it use?
   Yes. Machine 360-6

2. By how much would the value of the company increase if it accepted the better machine? Round your answer to the nearest cent.
   $ ___

3. What is the equivalent annual annuity for each machine? Round your answer to the nearest cent.

   Machine 190-3	$ ___
   Machine 360-6	$ ___

Answer 1

190-3	Year	Cash flow	× discount factor	Present value
		$    (225,000)		$(225,000.00)
	1	$        95,000	0.909091	$    86,363.64
	2	$        95,000	0.826446	$    78,512.40
	3	$        95,000	0.751315	$    71,374.91
	NPV		2.486852	$    11,250.94
(a)	EAC - A	11250.94/ 2.486852		$      4,524.17
360-6	Year	Cash flow	× discount factor	Present value
		$    (375,000)		$(375,000.00)
	1	$     104,500	0.909091	$    95,000.00
	2	$     104,500	0.826446	$    86,363.64
	3	$     104,500	0.751315	$    78,512.40
	4	$     104,500	0.683013	$    71,374.91
	5	$     104,500	0.620921	$    64,886.28
	6	$     104,500	0.564474	$    58,987.53
	NPV		4.355261	$    80,124.74
(b)	EAC - B	80124.74/ 4.355261		$    18,397.23

a

NPV :

190-3 is: 11,250.94

360-6: 80,124.74

b

Increase = 68,873.80

c

Equal annual annuity is:

	EAA
190-3	$    4,524.17
360-6	$ 18,397.23

please rate.