Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older

Question:

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 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 of $1,000 at the end of this period. The firm’s is 14 percent and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method.
a. What is the net cash flow in year 0 (that is, initial outlay)?
b. What are the net cash flows after taxes in each of the next 10 years?
c. What is the of the investment?
d. Should Alliance replace its existing drill press?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...