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lys-0071 [83]
3 years ago
12

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 $120,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $18,900 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? Do not round intermediate calculations. Round your answer to the nearest cent. Negative value, if any, should be indicated by a minus sign.NPV: $ _________
Business
1 answer:
lora16 [44]3 years ago
5 0

Answer:

Chen should buy the new machine since it produces a positive NPV of  $1,294

Explanation:

Summary of the Project Cash Flows is as follows :

Year 0                                  = ($120,000)

Year 1 to Year 10                 =    $18,900

The Project cost of capital = 9%

Calculation of the Project`s NPV :

<em>NPV can be calculated from this summary using a financial calculator as :</em>

<em>CF0 = ($120,000)</em>

<em>CF1  = $18,900</em>

<em>Nj     = 10</em>

<em>i       = 9 %</em>

<em>NPV =  ? </em>

<em>NPV = $1,293.73 or $1,294</em>

The Project is accepted only if it has a Positive NPV

Conclusion,

Chen should buy the new machine since it produces a positive NPV of  $1,294.

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