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. 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.

Then offer a recommendation on whether or not the existing coining press should be replaced at this time. And please make sure that it is easy to determine how you arrived at your incremental cash flows!

MACRS Depreciation Percentages -- Half-Year Convention PROPERTY CLASS RECOVERY YEAR 3-YEAR 5-YEAR 7-YEAR 10-YEAR 33.33% 44.45 14.81 7.41 1 2 3 4 5 6 7 8 9 10 11 20.00% 32.00 19.20 11.52 11.52 5.76 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46 10.00% 18.00 14.40 11.52 9.22 7.37 6.55 6.55 6.56 6.55 3.28 Totals 100.00% 100.00% 100.00% 100.00%