The Chang Company is considering the purchase of a new machine to replace an obs
ID: 2733706 • Letter: T
Question
The Chang Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has a book value and a market value of zero. However, the machine is in good working order and will last at least another 5 years. The proposed replacement machine will perform the operation so much more efficiently that Chang’s engineers estimate that it will produce after-tax cash flows (labor savings and depreciation) of $10,500 per year. The new machine will cost $31,500 delivered and installed, and its economic life is estimated to be 5 years. It has zero salvage value. The firm’s WACC is 6.00%, and its marginal tax rate is 40%. Calculate the NPV of the replacement analysis?
Explanation / Answer
Calculation of NPV:
Initial Cash Outflow:
Cost of new machine = -$31500
Recurring Cash Flows:
After Tax Cash Flows = $10500
Year
Cash Flow
PVF (6%)
PV of Cash Flow
0
-$31500
1
-$31500
1-5
$10500
4.21236
$44229.78
$12729.78
NPV of replacement analysis = $12729.78
Year
Cash Flow
PVF (6%)
PV of Cash Flow
0
-$31500
1
-$31500
1-5
$10500
4.21236
$44229.78
$12729.78