The management of Devine Instrument Company is considering the purchase of a new drilling machine, model RoboDril $1010$K$.$ According to the specifications and testing results, RoboDril will substantially increase productivity over AccuDril X$10,$ the machine Devine is currently using.

The AccuDril was acquired $8$ years ago for $$130,000$ and is being depreciated using the straight$-$line method over a $10-$year expected life and an estimated salvage value of $$10,000.$ The engineering department expects the AccuDril to keep going for another $3$ years after a major overhaul at the end of its expected useful life. The estimated cost for the overhaul is $$120,000.$ The overhauled machine will be depreciated using straight$-$line depreciation with no salvage value. The overhaul will improve the machine$$s operating efficiency approximately $15\%$ for each of years $3,4,$ and $5.$ No other operating conditions will be affected by the overhaul.

RoboDril $1010$K is selling for $$260,000.$ Installing, testing, rearranging, and training will cost another $$20,000.$ The manufacturer is willing to take the AccuDril as a trade$-$in for $$30,000.$ The RoboDril will be depreciated using the straight$-$line method with no salvage value. New technology most likely will make RoboDril obsolete to the firm in $5$ years.

Variable operating cost for either machine is the same: $$11$ per machine hour $($cash$-$based$).$ Other pertinent data follow:

AccuDril X$10$ RoboDril $1010$K

Units of output $($per year$)10,00010,000$

Machine hours $8,0004,000$

Selling price per unit $ $100$ $ $100$

Variable manufacturing cost$$cash$-$based $($not including machine hours$)$ $ $30$ $ $30$

Other annual expenses $($tooling and supervising$)$ $ $90,000$ $ $60,000$

Disposal value$$today $ $15,000$

Disposal value$$in $5$ years $ $0$ $ $50,000$

Devine Instrument Company$$s weighted$-$average cost of capital $($WACC$)$ is $12\%,$ and it is in the $40\%$ tax bracket. Use the PV factors $($Appendix C$,$ Table $1)$ for calculating the NPV of each decision alternative.

Required:

$1.$ Determine for each of years $0$ though $5($inclusive$)$ the after$-$tax cash flows for items that differ between the two alternatives.

$2.$ Compute the payback period $($in years$)$ for purchasing RoboDril $1010$K rather than having AccuDril X$10$ overhauled in $2$ years. Assume for this calculation only that all cash flows $($other than those related to the net acquisition cost of the replacement asset$)$including tax effects$$occur evenly throughout the year.

$3.$ Using results generated in requirement $1,$ what is the present value of each decision alternative, keep vs$.$ replace?