A small factory is considering replacing its existing coining press with a newer, more efficient one. The existing press was purchased five years ago at a cost of $200,000, and it is being depreciated according to a 7-year MACRs depreciation schedule and the first five years of depreciation have been taken (see below for MACRs chart). The CFO estimates that the existing press has 6 years of useful life remaining. The purchase price for the new press is $306,000. The installation of the new press would cost an additional $24,000, and this cost would be capitalized and added to the depreciable base rather than expensed immediately. The new press (if purchased) would be depreciated using the 7-year MACRs depreciation schedule. Interest expense associated with the purchase of the new press is estimated to be roughly $7,900 per year for the next 6 years. The appeal of the new press is that it is estimated to produce a pre-tax operating cost savings of $75,000 per year for the next 6 years, and the new press also has a useful life of 6 years. Also, if the new press is purchased, the old press can be sold for $30,000 today. The CFO believes that the new press would be sold for $45,000 at the end of its 6-year useful life. Assume that NWC would not be affected. The company has an average tax rate of 25% and a marginal tax rate of 30% going forward. The cost of capital (i.e., discount rate) for this project is 12%. Develop the incremental cash flows for this replacement decision and use them to calculate NPV and IRR. Next, make a recommendation about whether or not the existing coining press should be replaced at this time.

7-Year MACRs:

1: 14.29%

2: 24.49%

3: 17.49%

4: 12.49%

5: 8.93%

6: 8.92%

7: 8.93%

8: 4.46%