Adequate information: Market value = $2,800,000 Book value = $1,600,000 Maintenance cost (Saving) of current machine = $855,000 Economic life of current machine = 5 years Depreciation of current machine = $320,000 Pre-tax salvage value of current machine = $140,000 Initial cost of new machine = $4,500,000 Economic life of new machine = 5 years Pre-tax salvage value of new machine = $900,000 Maintenance cost (Saving) of new machine = $350,000 Depreciation of new machine = $900,000 Tax rate = 21% or 0.21 Appropriate discount rate, r = 8% or 0.08 To compute: Whether the new machine should be bought by the company. Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow .

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Chapter 6, Problem 30QAP

Summary Introduction

Adequate information:

Market value = $2,800,000

Book value = $1,600,000

Maintenance cost (Saving) of current machine = $855,000

Economic life of current machine = 5 years

Depreciation of current machine = $320,000

Pre-tax salvage value of current machine = $140,000

Initial cost of new machine = $4,500,000

Economic life of new machine = 5 years

Pre-tax salvage value of new machine = $900,000

Maintenance cost (Saving) of new machine = $350,000

Depreciation of new machine = $900,000

Tax rate = 21% or 0.21

Appropriate discount rate, r = 8% or 0.08

To compute: Whether the new machine should be bought by the company.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

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