The Jeffco Corporation is a small plastic manufacturing firm located in Jeffersonville, IN$.$ The

owner, Susanne Wagener, is considering replacing an existing extrusion press with a faster press

that has greater output capacity and operates with less labor. Her only alternative is to overhaul

her existing press which has a current net book value of $$75,000$ and $3$ years of remaining

depreciable life $($straight line$).$ Since the existing machine has become unreliable, one of these

two options must be chosen.

The current press would cost $$225,000$ to overhaul, but this outlay would increase its useful life

for $5$ years. Ms$.$ Wagener$$s accountant tells her that the new net book value of the overhauled old

press, the existing net book value plus the overhaul expenditure, could be depreciated straight line

to zero over five years. The old press has a $$50,000$ salvage value currently. However, if

overhauled, the existing press would have a zero salvage value in five years.

The new press would cost $$950,000$ including freight in and installation. This press would be

depreciated straight line to zero over $5$ years, also its economic life, and have an estimated $$40,000$

salvage value at the end of the period.

Because of programmable features, the new press would allow Ms$.$ Wagener to lay off one operator

who currently earns $$30,000$ per year plus an additional $25$ percent in benefits. Given Jeffco$$s

labor contract, labor costs plus benefits are expected to increase at the rate of inflation, estimated

at $4\%,$ in addition to a $3\%$real$$ wage increase per year over the next five years.

Even though the new press has increased capacity, Ms$.$ Wagener does not think that any extra

products could be sold until the beginning of year $2,$ i$.$e$.,$ revenues for both alternative presses

would be equal for the first year. At that time, she estimates that incremental sales less expenses

would result in additional net cash inflows before tax of $$95,000$ per year in today$$s dollars. Both

revenues and expenses are expected to grow at the inflation rate of $4\%.$ However, at the end of

year $1$ net working capital would have to be increased by $$10,000$ to support the higher sales. No

subsequent increases in net working capital are anticipated. Jeffco is currently in the $35\%$ marginal

tax bracket, and does not expect this to change in the next $5$ years.

If the company uses a $14\%$ discount to evaluate capital budgeting projects, which option should

$3$

Ms$.$ Wagener take? Should she overhaul the old press or buy a new press? Be sure to show all of

your calculations.