Although the Chen Company's milling machine is old, it is still in relatively good working order...

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Although the Chen Company's milling machine is old, itis still in relatively good working order and would last foranother 10 years. It is inefficient compared to modern standards,though, and so the company is considering replacing it. The newmilling machine, at a cost of $38,000 delivered and installed,would also last for 10 years and would produce after-tax cash flows(labor savings and depreciation tax savings) of $8,600 per year. Itwould have zero salvage value at the end of its life. The Projectcost of capital is 11%, and its marginal tax rate is 35%.
Should Chen buy the new machine?

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3.8 Ratings (336 Votes)

Here the Investment Decision can be taken based on the Net Present Value NPV of the Project The Project should be accepted if the NPV is Positive else Reject the Project Net Present Value NPV See Answer

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Transcribed Image Text

Although the Chen Company's milling machine is old, itis still in relatively good working order and would last foranother 10 years. It is inefficient compared to modern standards,though, and so the company is considering replacing it. The newmilling machine, at a cost of $38,000 delivered and installed,would also last for 10 years and would produce after-tax cash flows(labor savings and depreciation tax savings) of $8,600 per year. Itwould have zero salvage value at the end of its life. The Projectcost of capital is 11%, and its marginal tax rate is 35%.Should Chen buy the new machine?