Problem 10-18 Unequal Lives Filkins Fabric Company is considering the replacemen

Question

Problem 10-18
Unequal Lives

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 $180,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $94,000 per year; and Machine 360-6, which has a cost of $380,000, a 6-year life, and after-tax cash flows of $108,000 per year. Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines.

Assume that Filkins' cost of capital is 16%. 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?
-Select-Yes. Machine 190-3Yes. Machine 360-6NoItem 3

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

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

Explanation / Answer

NPV of Machine 190-3=-$180,000+$94,000*2.2459(AVPV for 3 years @16%)

=-$180,000+$211,115=$31,115

NPV of Machine 360-6=-$380,000+$108,000*3.6847(AVPV for 6 years @16%)

=-$380,000+$397,948=$17,948

Select-Yes Machine 190-3-Yes Machine 360-6 NO

equivalent annual annuity

Machine 190-3=$31,115/2.2459=$13,853

Machine 360-6=$17,948/3.6847=$4,871

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