Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of $10$ additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings $($in labor, materials, and maintenance$)$ of $$12,000$ per year. The new machine costs $$50,000$ delivered and installed. It has an estimated useful life of $10$ years and a salvage value of $$2,000$ at the end of this period. The firm$$s cost of capital is $14$ percent, and its marginal income tax rate is $40$ percent. The firm uses the straight$-$line depreciation method.

Complete the following table to compute the net present value $($NPV$)$ of the investment. $($Hint: Remember that, in Year $10,$ Alliances also receives the salvage value of the machine.$)$

Year

Cash Flow

PV Interest Factor at $14\%$

Present Value $($PV$)$

$($$$)$

$($$$)$

$0$

$

$1\mathrm{.}00000$

$

$1$

$

$0\mathrm{.}87719$

$2$

$

$0\mathrm{.}76947$

$3$

$

$0\mathrm{.}67497$

$4$

$

$0\mathrm{.}59208$

$5$

$

$0\mathrm{.}51937$

$6$

$

$0\mathrm{.}45559$

$7$

$

$0\mathrm{.}39964$

$8$

$

$0\mathrm{.}35056$

$9$

$

$0\mathrm{.}30751$

$10$

$

$0\mathrm{.}26974$

Net Present Value

Should Alliance replace its existing drill press?

No

Yes