Redo Problem 14.13 with the following additional information.
• The current book value of the old machine is $4,000, and the annual depreciation charge is $800 if the firm decides to keep the old machine for the additional five years.
• The new asset is classified as a seven-year MACRS property.
• The company's marginal tax rate is 40%, and the firm uses a 10% after-tax MARR.
In Problem 14.13
The Greenleaf Company is considering purchasing a new set of air-electric quill units to replace an obsolete one. The machine currently being used for the operation has a market value of zero. However, it is in good working order, and it will last for at least an additional five years. The new quill units will perform the operation with so much more efficiency that the firm's engineers estimate that labor, material, and other direct costs will be reduced $3,000 a year if the units are installed. The new set of quill units costs $10,000 delivered and installed, and its economic life is estimated to be five years with zero salvage value. The firm's MARR is 13%.
(a) What investment is required to keep the old machine?
(b) Compute the cash flow to use in the analysis for each option.
(c) If the firm uses the internal-rate-of-return criterion, should the firm buy the new machine on that basis?