Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method. Complete the following table to compute the net present value (NPV) of the investment. (Hint: Remember that, in Year 10, Alliances also receives the salvage value of the machine.) Year Cash Flow PV Interest Factor at 14% Present Value (PV) ($) ($) 0 1.00000 1 0.87719 2 0.76947 3 0.67497 4 0.59208 5 0.51937 6 0.45559 7 0.39964 8 0.35056 9 0.30751 10 0.26974 Net Present Value Should Alliance replace its existing drill press?
Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method. Complete the following table to compute the net present value (NPV) of the investment. (Hint: Remember that, in Year 10, Alliances also receives the salvage value of the machine.) Year Cash Flow PV Interest Factor at 14% Present Value (PV) ($) ($) 0 1.00000 1 0.87719 2 0.76947 3 0.67497 4 0.59208 5 0.51937 6 0.45559 7 0.39964 8 0.35056 9 0.30751 10 0.26974 Net Present Value Should Alliance replace its existing drill press?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years and a salvage value of $1,000 at the end of this period. The firm’s cost of capital is 14 percent, and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method.
Complete the following table to compute the net present value (NPV) of the investment. (Hint: Remember that, in Year 10, Alliances also receives the salvage value of the machine.)
|
Year
|
Cash Flow
|
PV Interest Factor at 14%
|
Present Value (PV)
|
|---|---|---|---|
|
($)
|
($)
|
||
| 0 |
|
1.00000 |
|
| 1 |
|
0.87719 | |
| 2 |
|
0.76947 | |
| 3 |
|
0.67497 | |
| 4 |
|
0.59208 | |
| 5 |
|
0.51937 | |
| 6 |
|
0.45559 | |
| 7 |
|
0.39964 | |
| 8 |
|
0.35056 | |
| 9 |
|
0.30751 | |
| 10 |
|
0.26974 | |
| Net Present Value |
Should Alliance replace its existing drill press?
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