The Chandler Corporation is considering replacing the lathe it currently uses to create table legs. The lathe,purchased ...
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The Chandler Corporation is considering replacing the lathe it currently uses to create table legs. The lathe,
purchased just 2 years ago, is being depreciated on a straight-line basis and has 6 years of remaining life. Its current book value is
$2,100, and it can be sold on an Internet auction site for $4,500 at this time. Thus, the annual depreciation expense is $2,100/6=$350 per year. If
the old lathe is not replaced, it can be sold for $800 at the end of its useful life. Chandler is considering purchasing the Turbo Lathe 4000, a higherend lathe, which costs $7,800, and has an estimated useful life of 6 years with an estimated salvage value of $780. This steamer falls into the
MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new lathe is faster and
would allow for an output expansion, so sales would rise by $2,000 per year; even so, the new machine's much greater efficiency would reduce
operating expenses by $1,500 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but
accounts payable would simultaneously increase by $700. Chandlers's marginal federal-plus-state tax rate is 40%, and its WACC is 14%.
Should it replace the old Lathe?
What is the NPV of the project? Round your answer to the nearest dollar.
purchased just 2 years ago, is being depreciated on a straight-line basis and has 6 years of remaining life. Its current book value is
$2,100, and it can be sold on an Internet auction site for $4,500 at this time. Thus, the annual depreciation expense is $2,100/6=$350 per year. If
the old lathe is not replaced, it can be sold for $800 at the end of its useful life. Chandler is considering purchasing the Turbo Lathe 4000, a higherend lathe, which costs $7,800, and has an estimated useful life of 6 years with an estimated salvage value of $780. This steamer falls into the
MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new lathe is faster and
would allow for an output expansion, so sales would rise by $2,000 per year; even so, the new machine's much greater efficiency would reduce
operating expenses by $1,500 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but
accounts payable would simultaneously increase by $700. Chandlers's marginal federal-plus-state tax rate is 40%, and its WACC is 14%.
Should it replace the old Lathe?
What is the NPV of the project? Round your answer to the nearest dollar.
