Problem Four (10 marks):

Kaplan Incorporated currently uses an older model BAII plus milling machine that was

purchased two years ago for $10,000. The machine would be sold today for $3,000. If the old

machine is not replaced, it is expected to operate for another 4 years at which time its salvage

value will be $1,200. The BAII plus currently generates revenues of $13,000 per year. The

machine has annual operating costs of $8,000 per year. The company maintains an investment of

$1,750 in operating net working capital with the old machine.

Kaplan Incorporated is considering acquiring a new milling machine to replace its old milling

machine. The new milling machine has a capital cost of $12,000 and an estimated useful life of 4

years and an expected salvage value of $2,000. The company expects the new machine to

generate total revenues of $25,000 per year. The new machine would have operating costs of

$11,000 per year. With the new machine, the investment in operating net working capital would

be increased to $2,500 and remain at this level until the end of the project.

Both machines have a CCA rate of 30%. The companys tax rate is 35%. The project has a

required rate of return of 15% per year compounded annually.

What is the NPV of the project, which replaces the old machine with the new machine?

Please show me how to do this question on excel showing all formulas. The answer was also provided as $9,694.16. However I want to know how the prof got to this answer.