Problem $11-04$

Replacement Analysis

Although the Chen Company's milling machine is old, it is still in relatively good working order and would last for another $10$ years. It is inefficient compared to modern standards, though, and so the company is considering replacing it$.$ The new milling machine, at a cost of $$42,000$ delivered and installed, would also last for $10$ years and would produce after$-$tax cash flows $($labor savings and depreciation tax savings$)$ of $$9,100$ per year. It would have zero salvage value at the end of its life. The Project cost of capital is $11\%,$ and its marginal tax rate is $35\%.$

Should Chen buy the new machine?