The following information pertains to a proposed replacement project with a five
ID: 2676679 • Letter: T
Question
The following information pertains to a proposed replacement project with a five-year life:Proposed investment in new machine
$125,000
Cost of old machine (purchased 4 years ago)
$60,000
Estimated salvage value of old machine
$40,000
Original depreciable life of old machine
8 years
Estimated depreciable life of new machine
5 years
Depreciation method for old machine
straight line
Depreciation method for new machine
straight line
Annual maintenance cost of old machine
$25,000
Estimated annual maintenance cost of new machine
$15,000
Projected annual labor savings from new machine
$20,000
Corporate tax rate
34%
Corporate cost of capital
12%
a. Develop the incremental cash flows for the project?
b. What is the project's NPV?
Explanation / Answer
Project NPV is $6,608.69
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