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Mailbox Corp. uses a production machine that costs $13,400 to maintain and will last for 1 more year. A production machine is essential to Mailbox Corp.’s ongoing business. Mailbox Corp. can buy a new...

Mailbox Corp. uses a production machine that costs $13,400 to maintain and will last for 1 more year. A production machine is essential to Mailbox Corp.’s ongoing business. Mailbox Corp. can buy a new production machine for $50,000 that can last the next 6 years and should require maintenance costs of $3,400 a year.

a. If the discount rate is 7% APR, compounded annually, what is the NPV of acquiring a new production machine?

b. If the discount rate is 7% APR, compounded annually, what is the EAC of acquiring a new production machine?

c. If the discount rate is 7% APR, compounded annually, should Mailbox replace the production machine?

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Answer #1

a.NPV of new machine = Present value of all cash outflows

= 50,000 + 3,400*PVAF(7%, 6 years)

= 50,000 + 3,400*4.7665

= $66,206.1

Hence, NPV of cost = $66,206.1

b.EAC = NPV/PVAF

= 66,206.1/4.7665

= $13,889.88

c.Since EAC of new machine is higher than the maintenance cost of old machine, MailBox SHOULD NOT replace the old machine

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