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shusha [124]
3 years ago
10

Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 y

ears. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $40,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $8,000 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?
Business
1 answer:
mario62 [17]3 years ago
3 0

Answer:

Chen should buy the machine

Explanation:

Buying of the new milling machine would make a business sense if the net present value of the new machine is positive.

By net present value I mean if the today's worth of the asset considering its initial cash outflow and subsequent cash inflows bring about a positive worth today.

Net present value=initial cost-cash inflows(discounted to today's terms)

Net present value=-$40,000+($8000*6.4177)

                          =-$40,000+51341.6

                          =$11,341.60

The 6.4177 is the annuity factor for 9% cost of capital for 10 years.

Since the project has a positive net present value,Chen should buy the machine

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