Reference no: EM133326480
Case: You are wondering whether to replace an old machine in your assembly line with a new machine. With the old machine, your annual production capacity is 9,200 units per year. The unit cost is $30.20, and you can sell each unit for $55.30. If you buy the new machine, the unit price goes up to $58.00 and the unit cost goes down to $28.20.
The new machine costs $200,000 today and it has an economic life of eight years. You will depreciate this asset to zero over that eight-year period. Yet, you believe that you can sell the machine for $12,000 by the end of its economic life.
Finally, the corporate tax rate is 15% and the WACC is 8.50%.
Question 1: Based on the information above, please calculate the total cash flows of (replacement) project for each year.
Question 2: Please calculate the NPV, profitability index (PI), and the discounted payback period (DPBP).
Question 3: If you want the discounted payback period (DPBP) of this project to be 6 years, what should be the unit price (keeping all else constant) with the new machine?
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