Reference no: EM133122053

Question - Calculating Project NPV - Calligraphy Pens is deciding when to replace its old machine. The machine's current salvage value is $2,200,000. Its current book value is $1,375,000. If not sold, the old machine will require maintenance costs of $625,000 at the end of the year for the next five years. Depreciation on the old machine is $275,000 per year. At the end of five years, it will have a salvage value of $70,000 and a book value of $0. A replacement machine costs $3,800,000 now and requires maintenance costs of $295,000 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 $660,000. It will be fully depreciated by the straight-line method. In five years, a replacement machine will cost $2,800,000. The company will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 23 percent and the appropriate discount rate is 9 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Calculate the NPV for the new and old machines.