Although the chen company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. it is inefficient compared to modern standards, though, and so the company is considering replacing it. the new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. it would have zero salvage value at the end of its life. the firm’s wacc is 10%, and its marginal tax rate is 35%. should chen buy the new machine?

Keeping the appropriate cash flow in the cash flow register, using a financial calculator, NPV should be calculated for taking the decision.

According to the NPV calculated, Chen should buy a new machine.

Explanation:

Cash outflow = $40000

Increase in annual after-tax cash flows : CF = $9000

Place the cash flow on a time line:

0 1 2 10

I 10 I I . . . I

-110000 19000 19000 19000

With a financial calculator, input the appropriate cash flow into the cash flow register, input I/YR = 10, and then solve for NPV. The answer for NPV is $6746.78.

Thus, Chen should buy a new machine.

explanation: doctrine of respondeat superior is a legal doctrine that is commonly used in tort. this principle makes an employer or principal legally responsible for the wrongful acts done by an employee or agent, if such acts occur within the scope of the employment or agency.