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1 . A small factory is considering replacing its existing coining press with a newer, more efficient one. The existing press was purchased three years
A small factory is considering replacing its existing coining press with a newer, more efficient one. The existing press was purchased three years ago at a cost of $ and it is being depreciated according to a year MACRs depreciation schedule. The CFO estimates that the existing press has years of useful life remaining. The purchase price for the new press is $ The installation of the new press would cost an additional $ and this cost would be added to the depreciable base. The new press if purchased would be depreciated using the year MACRs depreciation schedule. Interest expenses associated with the purchase of the new press are estimated to be roughly $ per year for the next years.The appeal of the new press is that it is estimated to produce a pretax operating cost savings of $ per year for the next years. Also, if the new press is purchased, the old press can be sold for $ today. The CFO believes that the new press would be sold for $ at the end of its year useful life. Assume that NWC would not be affected.The company has an average tax rate of and a marginal tax rate of The cost of capital ie discount rate for this project is
Develop the incremental cash flows for this replacement decision and use them to calculate NPV and IRR. Next, make a conclusion about whether or not the existing coining press should be replaced at this time. Make sure that it is easy to determine how you arrived at your incremental cash flows!
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