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Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years
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 $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 $18,300 per year. It would have zero salvage value at the end of its life. The Project cost of capital is 9%, and its marginal tax rate is 35%. 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.
NPV: $
Chen -Select-shouldshouldn'tItem 2 purchase the new machine.
Expert Solution
First let us know the present value of cash inflows:
Since the annual cash inflows are constant every year , i.e $18,300 per year.
We can use the present value of annuity formula to know the present value of cash inflows.
=> A * [1-(1+r)^(-n)]/r
here,
A =$18,300
r =9%=>0.09
n= 10 years.
present value = $18,300 *[1-(1.09)^(-10)]/0.09
=>18,300 * [0.5775892 / 0.09].
=>$117,443.14.
Present value of cash out flows = $110,000......(there is only one cash outflow which is towards the cost and which is incurred immediately).
Net present value (NPV) = present value of cash inflows - present value of cash outflows.
=>$117,443.14 - 110,000
=>$7,443.14..
Chen should purchase the new machine.
(since NPV is positive, Chen should purchase the new machine).
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