Problem 6-30 Calculating Project NPV Calligraphy Pens is deciding when to replace its old machine. The machine's current salvage value is $3,000,000. Its current book value is $1,775,000. If not sold, the old machine will require maintenance costs of $705,000 at the end of the year for the next five years. Depreciation on the old machine is $355,000 per year. At the end of five years, it will have a salvage value of $150,000 and a book value of $0. A replacement machine costs $4,600,000 now and requires maintenance costs of $375,000 at the end of each year during its economic life of five years. At the end of the five years, the new machine will have a salvage value of $740,000. It will be fully depreciated by the straight-line method. In five years, a replacement machine will cost $3,600,000. The company will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 24 percent and the appropriate discount rate is 8 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Calculate the NPV for the new and old machines. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Answer is complete but not entirely correct. New machine $ -498,045.32 × Old machine $ 3,310,929.63 ×
Problem 6-30 Calculating Project NPV Calligraphy Pens is deciding when to replace its old machine. The machine's current salvage value is $3,000,000. Its current book value is $1,775,000. If not sold, the old machine will require maintenance costs of $705,000 at the end of the year for the next five years. Depreciation on the old machine is $355,000 per year. At the end of five years, it will have a salvage value of $150,000 and a book value of $0. A replacement machine costs $4,600,000 now and requires maintenance costs of $375,000 at the end of each year during its economic life of five years. At the end of the five years, the new machine will have a salvage value of $740,000. It will be fully depreciated by the straight-line method. In five years, a replacement machine will cost $3,600,000. The company will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 24 percent and the appropriate discount rate is 8 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Calculate the NPV for the new and old machines. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Answer is complete but not entirely correct. New machine $ -498,045.32 × Old machine $ 3,310,929.63 ×
Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter12: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 11P: REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old...
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Transcribed Image Text:Problem 6-30 Calculating Project NPV
Calligraphy Pens is deciding when to replace its old machine. The machine's current
salvage value is $3,000,000. Its current book value is $1,775,000. If not sold, the old
machine will require maintenance costs of $705,000 at the end of the year for the next
five years. Depreciation on the old machine is $355,000 per year. At the end of five
years, it will have a salvage value of $150,000 and a book value of $0. A replacement
machine costs $4,600,000 now and requires maintenance costs of $375,000 at the end
of each year during its economic life of five years. At the end of the five years, the new
machine will have a salvage value of $740,000. It will be fully depreciated by the
straight-line method. In five years, a replacement machine will cost $3,600,000. The
company will need to purchase this machine regardless of what choice it makes today.
The corporate tax rate is 24 percent and the appropriate discount rate is 8 percent. The
company is assumed to earn sufficient revenues to generate tax shields from
depreciation. Calculate the NPV for the new and old machines. (Do not round
intermediate calculations and enter your answers in dollars, not millions of dollars,
rounded to 2 decimal places, e.g., 1,234,567.89.)
Answer is complete but not entirely correct.
New machine
$
-498,045.32 ×
Old machine
$
3,310,929.63 ×
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