Problem $6-30$ Calculating Project NPV

$9\mathrm{.}09$

points

Calligraphy Pens is deciding when to replace its old machine. The machine's current

salvage value is $$2,150,000.$ Its current book value is $$1,350,000.$ If not sold, the old

machine will require maintenance costs of $$620,000$ at the end of the year for the next

five years. Depreciation on the old machine is $$270,000$ per year. At the end of five

years, It will have a salvage value of $$65,000$ and a book value of $$0.$ A replacement

machine costs $$3,750,000$ now and requires maintenance costs of $$290,000$ at the end

of each year during its economic life of five years. At the end of the five years, the new

machine will have a salvage value of $$655,000.$ It will be fully depreclated by the

straight$-$line method. In five years, a replacement machine will cost $$2,750,000.$ The

company will need to purchase this machine regardless of what cholce it makes today.

The corporate tax rate is $22$ percent and the approprlate discount rate is $8$ percent. The

company is assumed to earn sufficlent revenues to generate tax shlelds from

depreclation. Calculate the NPV for the new and old machines. $($Do not round

Intermedlate calculations and enter your answers In dollars, not millions of dollars,

rounded to $2$ decimal places, e$.$g$.,1,234,567\mathrm{.}89.)$