Question

Problem 11-04 (Replacement Analysis) Question 5 of 9 Check My Work (1 remaining) eBook Replacement Analysis 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 $114,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,500 per year. It would have zero salvage value at the end of its life. The project cost of capital is 10%, and its marginal tax rate is 25%. 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: $ NPV: $ 217310 Chen shouldn't purchase the new machine. Hide Feedback Partially Correct Check My Work (1 remaining)

Answer 1

Time line		0	1	2	3	4	5	6	7	8	9	10
Cost of new machine		-114000
=Initial Investment outlay		-114000
													100.00%
Depreciation	Cost of equipment/no. of years		-11400	-11400	-11400	-11400	-11400	-11400	-11400	-11400	-11400	-11400	0	=Salvage Value
=after tax operating cash flow			18500	18500	18500	18500	18500	18500	18500	18500	18500	18500
+Tax shield on salvage book value	=Salvage value * tax rate											0
=Terminal year after tax cash flows												0
Total Cash flow for the period		-114000	18500	18500	18500	18500	18500	18500	18500	18500	18500	18500
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331	1.4641	1.61051	1.771561	1.9487171	2.1435888	2.357948	2.593742
Discounted CF=	Cashflow/discount factor	-114000	16818.18182	15289.2562	13899.32382	12635.749	11487.044	10442.768	9493.425187	8630.3865	7845.806	7132.551
NPV=	Sum of discounted CF=	-325.51