Question
Pilot Plus Pens is deciding when to replace its old machine. The machines current salvage value is $2.25 million. Its current book value is $1.45
Pilot Plus Pens is deciding when to replace its old machine. The machines current salvage value is $2.25 million. Its current book value is $1.45 million. If not sold, the old machine will require maintenance costs of $850,000 at the end of the year for the next five years. Depreciation on the old machine is $290,000 per year. At the end of five years, it will have a salvage value of $125,000 and a book value of $0. A replacement machine costs $4.35 million now and requires maintenance costs of $335,000 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 $805,000. It will be fully depreciated by the straight-line method. In five years a replacement machine will cost $3,250,000. Pilot will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 40 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.
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started