Loma, Inc. has an opportunity to purchase a new, more efficient press, Model T, to replace an

Question:

Loma, Inc. has an opportunity to purchase a new, more efficient press, Model T, to replace an old press, Model P, now in use.

Loma's vice president in charge of purchasing has reported that the new press, Model T, will cost $200,000, and will be depreciated over 5 years life using the straight line method.

From an examination of the company's books, you have determined that Model P, which was purchased 5 years ago for $150,000 is being depreciated over a 10-year period. The market value of older press is now $50,000 and has zero salvage value at the end of its 10-year life.

The company will also be able to reduce operating costs by $45,000 annually over its life.

Loma's income tax rate is 40 percent. If the cost of capital for a project of an all-equity firm is 14 percent, should Loma replace Model P with Model T?

Support your answer by showing the calculation of followings:

a. Net Initial Outlay

b. Annual Cash Flows

c. Net Present Value

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...