Coiner Clothes Inc. is considering the replacement of its old, fully depreciated
ID: 2650223 • Letter: C
Question
Coiner Clothes Inc. is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: (a) Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and (b) Machine 360-6, which has a cost of $360,000 a 6-year life, and after-tax cash flows of $98,300 per year. Assume both projects can be repeated. Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Cotner
Explanation / Answer
Using a financial calculator, input the following data: CF0= -190000; CF1-3=87000;
I/YR =14; and solve for NPV190-3= $11,982(for 3 years).
Extended NPV190-3= $11,982+$11,982/(1.14) power 3=$20,070
Using a financial calculator, input the following data: CF0= -360000; CF1-6=98300;
/YR =14; and solve for NPV360-6= $22,256 (for 6 years).
Both new machines have positive NPVs; hence the old machine should be replaced.
Further, since its NPV is greater, choose MODEL 360-6.