Pilot Plus Pens is deciding when to replace its old machine. The machine's current salvage value...

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Pilot Plus Pens is deciding when to replace its old machine. Themachine's current salvage value is $2.31 million. Its current bookvalue is $1.51 million. If not sold, the old machine will requiremaintenance costs of $856,000 at the end of the year for the nextfive years. Depreciation on the old machine is $302,000 per year.At the end of five years, it will have a salvage value of $131,000and a book value of $0. A replacement machine costs $4.41 millionnow and requires maintenance costs of $341,000 at the end of eachyear during its economic life of five years. At the end of the fiveyears, the new machine will have a salvage value of $811,000. Itwill be fully depreciated by the straight-line method. Pilot willneed to purchase this machine regardless of what choice it makestoday. The corporate tax rate is 40 percent and the appropriatediscount rate is 8 percent. The company is assumed to earnsufficient revenues to generate tax shields from depreciation.Calculate the NPV for new and old machines.

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The costs cash flows and NPV for the old machine are depreciation tax shield per year 302000 40 This is anet cash inflow since depreciation is a tax deductible expense Thetax savings due to depreciation is a cash inflownet cash See Answer

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Pilot Plus Pens is deciding when to replace its old machine. Themachine's current salvage value is $2.31 million. Its current bookvalue is $1.51 million. If not sold, the old machine will requiremaintenance costs of $856,000 at the end of the year for the nextfive years. Depreciation on the old machine is $302,000 per year.At the end of five years, it will have a salvage value of $131,000and a book value of $0. A replacement machine costs $4.41 millionnow and requires maintenance costs of $341,000 at the end of eachyear during its economic life of five years. At the end of the fiveyears, the new machine will have a salvage value of $811,000. Itwill be fully depreciated by the straight-line method. Pilot willneed to purchase this machine regardless of what choice it makestoday. The corporate tax rate is 40 percent and the appropriatediscount rate is 8 percent. The company is assumed to earnsufficient revenues to generate tax shields from depreciation.Calculate the NPV for new and old machines.