Question

Pilot Plus Pens is deciding when to replace its old machine. The machine's current salvage value is $2.24 million. Its current book value is $1.44 million. If not sold, the old machine will require maintenance costs of $849,000 at the end of the year for the next five years. Depreciation on the old machine is $288,000 per year. At the end of five years, it will have a salvage value of $124,000 and a book value of $0. A replacement machine costs $4.34 million now and requires maintenance costs of $334,000 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 $804,000. It will be fully depreciated by the straight-line method. Pilot will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 39 percent and the appropriate discount rate is 7 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation.
  
Calculate the NPV for new and old machines.

New MAchine - NPV __________________

Old Machine - NPV _________________

Answer 1

fix 12/5 C3 A В C D E F Н K L Maintenan Depreciatio Depreciati Operating Net after-taxPVIF@ Tax@39% Net income cash flows 1 cash flow 7% Present value Year EBT Investment ce n on $ -4,340,000 $ -4,340,000 1.000 (4,340,000.00) 0.935 $ 0.873 $ 0.816 $ 0.763 $ 0.713 $ 0 1 $-334,000 $-868,000 $-1,202,000 $-468,780$-733,220 $ 868,000 $ 134,780 2 $-334,000 $-868,000 -1,202,000 $-468,780$-733,220 $868,000 $134,780 3$-334,000 $-868,000 -1,202,000 $-468,780$-733,220 $868,000 $134,780 4 $-334,000 $-868,000 -1,202,000 $-468,780$-733,220 $ 868,000 134,780 5 -334,000 $-868,000 $-1,202,000 $-468,780$-733,220 868,000 $134,780$ 3 125,962.62 134,780 $ 4 134,780 117,722.07 5 134,780 110,020.63 $ 6 134,780 102,823.02 490,440 $ 7 445,773.22 625,220 8 -804000* (1-39%) (3,437,698.45) 9 Net present value New machine 10 Net after-tax PVIF@ Maintenan Depreciatio Depreciati Operating cash flows Investment Tax@39% Net income cash flow 11 Year 7% EBT Present value ce on 1.000 (1,928,000. 00) 0.935 $(379,037.38) 0.873 $ 0.816 $ 0.763 $ 0.713 $ $ -1,928,000 $ -1,928,000 0 1 $-849,000 $-288,000 -1,137,000$-443,430$-693,570 288,000 S-405,570 2 S-849,000 $-288,000 -1,137,000 $-443,430 $-693,570 $ 288,000 $-405,5 70 3 -849,000 $-288,000 $-1,137,000 $-443,430 $-693,570 $ 288,000 -405,570 4 S-849,000 $-288,000 $-1,137,000 $-443,430$-693,570 288,000 S-405,570 5 -849,000 $-288,000 $-1,137,000 $-443,430 -693,570 $288,000 S-405,570 $ 13 -405,570 $ 14 (354,240.55) -405,570 $ 15 (331,065.93) -405,570 $ (309,407.41) 16 -405,570 75,640 $ $ 17 (235,235.53) -329,930 18 =124000* (1-39%) $(3,536,986.80) 19 Net present value old machine 20 NPV 21 -$3,536,986.80 -$3,437,698.45 Select "New machine" 22 Old machine 23 New machine

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