Although the Chen Company%u2019s milling machine is old, it is still in relative

Question

Although the Chen Company%u2019s 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 $110,000 delivered and installed, would also last for 10 years and would produce

after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It

would have zero salvage value at the end of its life. The firm%u2019s WACC is 10%, and its

marginal tax rate is 35%. Should Chen buy the new machine?

Explanation / Answer

Hi,

Please find the answer as follows:

You need to calculate the NPV of the machine in this case:

NPV = -110000 + 19000/(1+.10)^1 + 19000/(1+.10)^2 + 19000/(1+.10)^3 + 19000/(1+.10)^4 + 19000/(1+.10)^5 + 19000/(1+.10)^6 + 19000/(1+.10)^7 + 19000/(1+.10)^8 + 19000/(1+.10)^9 + 19000/(1+.10)^10 = 6746.77 or 6747

Yes, Chen should buy the new machine.

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.