The Chang Company is considering the purchase of a new machine to replace an obs
ID: 2733851 • 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 $11,100 per year. The new machine will cost $33,300 delivered and installed, and its economic life is estimated to be 5 years. It has zero salvage value. The firm’s WACC is 7.20%, and its marginal tax rate is 40%. Calculate the NPV of the replacement analysis?
Explanation / Answer
The Chang Company All Amounts in $ After Tax Cash Flows per year 11100 for 5 years Cost of New Machine 33300 WACC 7.20% Based on this information, the Net Present Value or NPV of the replacement works out to $ 11,165.58