Commercial Hydronics is considering replacing one of its larger control devices. A new unit sells for $29,000

Question:

Commercial Hydronics is considering replacing one of its larger control devices. A new unit sells for $29,000 (delivered).An additional $3,000 will be needed to install the device. The new device has an estimated 20-year service life. The estimated salvage value at the end of 20 years will be $2,000. The new control device will be depreciated over 20 years on a straight-line basis to $0. The existing control device (original cost = $15,000) has been in use for 12 years, and it has been fully depreciated (that is, its book value equals zero). Its scrap value is estimated to be $1,000. The existing device could be used indefinitely, assuming the firm is willing to pay for its very high maintenance costs. The firm’s marginal tax rate is 40 percent. The new control device requires lower maintenance costs and frees up personnel who normally would have to monitor the system. Estimated annual cash savings from the new device will be $9,000. The firm’s cost of capital is 12 percent.

Evaluate the relative merits of replacing the old control device using the net present value approach.

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...