Question
Pilot Plus Pens is deciding when to replace its old machine. The machines current salvage value is $2.38 million. Its current book value is $1.58
Pilot Plus Pens is deciding when to replace its old machine. The machines current salvage value is $2.38 million. Its current book value is $1.58 million. If not sold, the old machine will require maintenance costs of $863,000 at the end of the year for the next 5 years. Depreciation on the old machine is $316,000 per year. At the end of 5 years, it will have a salvage value of $138,000 and a book value of $0. A replacement machine costs $4.48 million now and requires maintenance costs of $348,000 at the end of each year during its economic life of 5 years. At the end of the 5 years, the new machine will have a salvage value of $818,000. It will be fully depreciated by the straight-line method. In 5 years, a replacement machine will cost $3,380,000. Pilot will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 34 percent and the appropriate discount rate is 8 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. |
Calculate the NPV for new and old machines. NPV of new machine: $ NPV of old machine: $
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