Calligraphy Pens is deciding when to replace its old machine.The machine's current salvage value is $2,150,000. Its current bookvalue is $1,350,000. If not sold, the old machine will requiremaintenance costs of $620,000 at the end of the year for the nextfive years. Depreciation on the old machine is $270,000 per year.At the end of five years, it will have a salvage value of $65,000and a book value of $0. A replacement machine costs $3,750,000 nowand requires maintenance costs of $290,000 at the end of each yearduring its economic life of five years. At the end of the fiveyears, the new machine will have a salvage value of $655,000. Itwill be fully depreciated by the straight-line method. In fiveyears, a replacement machine will cost $2,750,000. The company willneed to purchase this machine regardless of what choice it makestoday. The corporate tax rate is 22 percent and the appropriatediscount rate is 8 percent. The company is assumed to earnsufficient revenues to generate tax shields fromdepreciation.Calculate the NPV for the new and old machines. |
