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    Capital investment in a new sewing machine

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    A company needs to replace its old, fully depreciated sewing machine: two options for replacement. One costs 190,000 with a 3 year expected life with after-tax cash flows (labor savings and depreciation)of 87,000 per year.

    The other machine option has a price tag of 360,000 with a 6 year expected life cyclE, generating after-tax cash flows of 98,300 per year. We can assume that both projects can be repeated.

    The WACC of this particular company is 14 percent. Should the company replace its old machine and if so with which model option? Show any calculations as necessary.

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    Solution Preview

    Please see attached file for complete details on your posting.

    Options 1 2
    Investment 190,000 360,000
    Expected life (years) 3 6
    After-tax cash flow per year 87000 98300
    Interest rate 14%
    IF option 1 is accepted , machinery must be replaced at the end of year 3 therefore cash flow in 3rd year =87000 -190000= -103000
    There are two ways to get NPV. 1) Compute using formula given below, ...

    Solution Summary

    Excel file contains calculations of NPV of two machines.