Replacement Analysis

Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $41,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $9,500 per year. It would have zero salvage value at the end of its life. The Project cost of capital is 12%, and its marginal tax rate is 35%.

Should Chen buy the new machine?