Question

The Chang Company is considering the purchase of a new machine to replace an obsolete one. The current machine has a useful life of 8 years and a depreciation of $3000 per year. The proposed machine costs $40000 and will last for 8 years. The $40000 will be 100% depreciated over a straight line basis for 8 years. The new machine is expected to perform more efficiently and will produce a before tax cost savings of 9000 a year. The firm’s cost of capital is 10 percent and has a tax rate of 35 percent. Should Chang buy the new machine

Answer 1

Current Netw machine depn- & 3000 per year useful life = 8 yos Paxrate = 85% Depreciation Pax shield (DTS) every year = 3000x35% = $1050 Present value of deph taxshield 1050 PVAF (354.18) = 1050X5.747 = $ 6034 Proposed machine depin eachgr = 40000 = 45000 DTS & 5000 x 35% $1450 Opv of DTS = 1750 (351.,8) - 195045.747 = $10057 sanings per year = 9000 ④ pv of post tax saving 9000 (1-135) PVAF (351,8) = 5850 PVAF (354,8) = 5850 X S1447 = 33620 Answer:- New machines Rv of Outflaus = $40000 Cosoof New machine - $ 40000 Prof Inflows = (10057 +33620) = $43677 NPV of proposed machine = (43677-40000) = $3677 # Current machine presently praiding inflow of $ 6034 Prof DTS. & proposed machine's every year Pv of inflow is $3677 as Calculated. is providing inflew of more Current machine cash than the proposed one, so the company should not replace the machine