Question
Mars Inc. is considering replacing an old machine. The machine purchased 2 years ago, is being depreciated on a straight-line basis and has four years
Mars Inc. is considering replacing an old machine. The machine purchased 2 years ago, is being depreciated on a straight-line basis and has four years of remaining life. Its current book value is $2,400, and it can be sold for $6,000 at this time. Thus, the annual depreciation expense is $2,400/4 = $600 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Mars is considering the purchase of a new machine which costs $30,000 and has an estimated useful life of 4 years with an estimated salvage value of $900. The machine falls into the MACRS 3-year class (33%, 45%, 15%, 7%). The machine will reduce manufacturing costs by $9,000 annually. The machine would require an increase in net working capital by $3,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 4 years. Mars's marginal tax rate is 40 percent, and it uses a 15 percent cost of capital to evaluate projects of this nature. What is the NPV of the replacement project?
(If the answer is -$55,555.55, then enter -55555.55 without comma.)
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