Question
Calligraphy Pens is deciding when to replace its old machine. The machine's current salvage value is $2,550,000. Its current book value is $1,550,000. If not
Calligraphy Pens is deciding when to replace its old machine. The machine's current salvage value is $2,550,000. Its current book value is $1,550,000. If not sold, the old machine will require maintenance costs of $660,000 at the end of the year for the next five years. Depreciation on the old machine is $310,000 per year. At the end of five years, it will have a salvage value of $105,000 and a book value of $0. A replacement machine costs $4,150,000 now and requires maintenance costs of $330,000 at the end of each year during its economic life of five years. At the end of the five years, the new machine will have a salvage value of $695,000. It will be fully depreciated by the straight-line method. In five years, a replacement machine will cost $3,150,000. The company will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 25 percent and the appropriate discount rate is 7 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. |
Calculate the NPV for the new and old machines. (Do not round intermediate calculations and enter your answers in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) |
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