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Pilot Plus Pens is deciding when to replace its old machine. The machine's current salvage value...

Pilot Plus Pens is deciding when to replace its old machine. The machine's current salvage value is $2.36 million. Its current book value is $1.56 million. If not sold, the old machine will require maintenance costs of $861,000 at the end of the year for the next five years. Depreciation on the old machine is $312,000 per year. At the end of five years, it will have a salvage value of $136,000 and a book value of $0. A replacement machine costs $4.46 million now and requires maintenance costs of $346,000 at the end of each year during its economic life of five years. At the end of the five years, the new machine will have a salvage value of $816,000. It will be fully depreciated by the straight-line method. In five years a replacement machine will cost $3,360,000. The company will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 40 percent and the appropriate discount rate is 6 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation.

  

Calculate the NPV for the new and old machines.
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Maintenan Depreciati Net Depreciati Operating income Net after-tax PVIF@ cash flows | Investment | cash flow | 6% | Present value $ -4,460,000 $-4,460,000 1.000$(4,460,000.00) $149,200 0.943 140,754.72 $149,200 0.890$ 132,787.47 $149,200 0.840$ 125,271.20 $149,200 0.792$ 118,180.37 7 5$-346,000 $-892,000$-1,238,000 $-495,200 $-742,800 $892,000 149,200 $489,600$ 638,800 0.747$ 477,348.52 1 Year се on EBT Tax@40% | on 0 3 1$-346,000 $-892,000$1,238,000 $-495,200 $-742,800 $892,000 149,200 42$-346,000 $-892,000$1,238,000 $-495,200 $-742,800 $892,000 149,200 53$-346,000 $-892,000$1,238,000 $-495,200 $-742,800 $892,000 149,200 6 4$-346,000 $-892,000$1,238,000 $-495,200 $-742,800 $892,000 149,200 -816000(1-40%) Net present value New machine $(3,465,657.72) Maintenan Depreciati Net Depreciati Operating income Net after-tax PVIF@ 11 Year cash flows | Investment | cash flow | 6% | Present value $ -2,040,000 $ -2,040,000 1.000(2,040,000.00) S -391,800 0.943 S (369,622.64) $ 391,800 0.890(348,700.61) S -391,800 0.840S (328,962.84) S -391,800 0.792S (310,342.30 17 5$-861,000 -312,0001,173,000 $-469,200 $-703,800 S312,000 $-391,800 $ 81,600-310,200 0.747(231,799.49) се on EBT Tax@40% | on 0 13 1$-861,000 $-312,000$ 1,173,000 $-469,200 $-703,800 $ 312,000 $-391,800 14 2 $-861,000 $-312,000$ 1,173,000 $-469,200 $-703,800 $ 312,000 $-391,800 15 3 $-861,000 $-312,000$ 1,173,000 $-469,200 $-703,800 $ 312,000 $-391,800 16 4 $-861,000 $-312,000$ 1,173,000 $-469,200 $-703,800 $ 312,000 $-391,800 -136000*(1-40%) Net present value old machine $(3,629,427.86) 20 NPV -$3,629,427.86 21 22 Old machine 23 New machine-$3,465,657.72 Select New machine

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