Reference no: EM131541941

Problem:

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 company's 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?

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