A small factory is considering replacing its existing coiningpress with a newer, more efficient one. The existing press waspurchased three years ago at a cost of $510,000, and it is beingfully depreciated according to a 7-year MACRS depreciation scheduleand you have taken 3 years of depreciation on the old machine. TheCFO estimates that the existing press has 6 years of useful liferemaining. The purchase price for the new press is $675,000. Theinstallation of the new press would cost an additional $25,000, andthis cost would be capitalized and added to the depreciable base(it needs to be depreciated on the same schedule as the new press).The new press, if purchased, would be fully depreciated to a valueof 0 using the 7-year MACRS depreciation schedule found below.Interest expense associated with the purchase is estimated to beroughly $12,000 per year for the next 6 years.

The appeal of the new press is that it is estimated to produce apre-tax operating cost savings of $120,000 per year for the next 6years, and the new press also has a useful life of 6 years. If thenew press is purchased, the old press can be sold for $80,000today. The CFO believes that the new press would be sold for$50,000 at the end of its 6- year useful life (and 6 years ofdepreciation). Assume that NWC would not be affected. The companyhad an average tax rate of 30% and has a marginal tax rate of 25%going forward. The cost of capital (i.e., discount rate) for thisproject is 9%.

Develop the incremental cash flows for this replacement decisionand use them to calculate NPV and IRR. Next, make a conclusionabout whether or not the existing coining press should be replacedat this time. Make sure that it is easy to determine how youarrived at your incremental cash flows!