Labor savings and depreciation

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Reference no: EM13933498

Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $215,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $85,900 per year; and Machine 360-6, which has a cost of $321,000, a 6-year life, and after-tax cash flows of $94,500 per year. Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Filkins' cost of capital is 11.50%. What is the equivalent annual annuity of Machine 190-3? What is the equivalent annual annuity of Machine 360-6? Should the company replace the old machine? Which machine should be chosen?

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Reference no: EM13933498

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