11.4. Replacement Analysis (5 points)
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 $39,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $9,300 per year. It would have zero salvage value at the end of its life. The firm’s WACC is 12%, and its marginal tax rate is 35%.
What is the NPV?
The NPV of project is
What is IRR?
The IRR of project is
Should Chen buy the new machine? Please enter your answer as buy or not-buy.
Chen should the machine.
Round your answer to two decimal places. For example, if your answer is $345.667 enter as 345.67 and if your answer is .05718 or 5.718% enter as 5.72 in the answer box provided.
Move
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $1,110,000, and it would cost another $24,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $590,000. The machine would require an increase in net working capital (inventory) of $8,500. The sprayer would not change revenues, but it is expected to save the firm $473,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 37%.
a. What is the Year 0 net cash flow?
The Year 0 net cash flow is $
b. What are the net operating cash flows in Years 1, 2, and 3?
Year 1 cash flow is $
Year 1 cash flow is $
Year 1 cash flow is $
c. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital – also called terminal value)?
The additional Year 3 cash flow is $
d. If the project’s cost of capital is 16.5%, what is the NPV of the project? IRR?
The NPV is $ and the IRR is %.
e. Should the machine be purchased? Please enter your answer as either buy or don’t buy.
the machine.
