Question
Pilot Plus Pens is deciding when to replace its old machine. The machine's current salvage value is $2.30 million. Its current book value is $1.50
Pilot Plus Pens is deciding when to replace its old machine. The machine's current salvage value is $2.30 million. Its current book value is $1.50 million. If not sold, the old machine will require maintenance costs of $855,000 at the end of the year for the next five years. Depreciation on the old machine is $300,000 per year. At the end of five years, it will have a salvage value of $130,000 and a book value of $0. A replacement machine costs $4.40 million now and requires maintenance costs of $340,000 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 $810,000. It will be fully depreciated by the straight-line method. In five years a replacement machine will cost $3,300,000. The company 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 9 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. |
Calculate the NPV for the new and old machines.(Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
NPV | |
Old machine | $ |
New machine | $ |
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