Question

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 $120,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,900 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: $ _________

Answer 1

Chen should buy the new machine since it produces a positive NPV of $1,294

Step-by-step explanation:

Summary of the Project Cash Flows is as follows :

Year 0 = ($120,000)

Year 1 to Year 10 = $18,900

The Project cost of capital = 9%

Calculation of the Project`s NPV :

NPV can be calculated from this summary using a financial calculator as :

CF0 = ($120,000)

CF1 = $18,900

Nj = 10

i = 9 %

NPV = ?

NPV = $1,293.73 or $1,294

The Project is accepted only if it has a Positive NPV

Conclusion,

Chen should buy the new machine since it produces a positive NPV of $1,294.