A small factory is considering replacing its existing coining press with a newer, more

efficient one. The existing press was purchased five years ago at a cost of $145,000, and

it is being depreciated according to a 7-year MACRs depreciation schedule. The CFO

estimates that the existing press has 6 years of useful life remaining. The purchase price

for the new press is $274,000. The installation of the new press would cost an additional

$36,000, and this cost would be added to the depreciable base. The new press (if

purchased) would be depreciated using the 7-year MACRs depreciation schedule.

Interest expenses associated with the purchase of the new press are estimated to be

roughly $8,200 per year for the next 6 years.

The appeal of the new press is that it is estimated to produce a pre-tax operating cost

savings of $78,000 per year for the next 6 years. Also, if the new press is purchased, the

old press can be sold for $25,000 today. The CFO believes that the new press would be

sold for $29,000 at the end of its 6-year useful life. Assume that NWC would not be

affected.

The company has an average tax rate of 28% and a marginal tax rate of 31%. The cost of

capital (i.e., discount rate) for this project is 13.20%.

How would I develop the incremental cash flows for this replacement decision and use them to

calculate NPV, IRR, MIRR, and PI?

Should the coining press be replaced now?