Calculate the NPV of this potential investment

O’Dell Enterprises manufactures lenses for telescopes. O’Dell is considering replacing a machine that grinds lenses and has received a proposal from a vendor for the new lens grinder. O’Dell has a 12 percent cost of capital and a 30 percent tax rate. The vendor will sell the company a new machine for $310,000 and buy the old machine, which has a $20,000 book value, for $30,000. The new machine is expected to generate $80,000 of pretax cash inflows, and the company calculates depreciation expense uniformly over its five-year life.

Required:

A. Calculate the net present value of the new machine.

B. Should O’Dell buy the new machine? Explain your answer.

In 2011 the Tricola Company is considering whether to replace its old de-icer with a more efficient deicer that costs $100,000. The old de-icer has a book value of $16,000 and can be sold for $20,000. The new de-icer will save $28,000 of operating cash flows before taxes in each of the next five years. Tricola will take $20,000 of depreciation in each of the next five years. It has a 30 percent tax rate and a 14 percent cost of capital. Calculate the NPV of this potential investment.

Should Tricola buy the new de-icer?

Solution:

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