Question about Replacement Chain
Cotner Clothes, Inc. is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and Machine 360-6, which costs $360,000, a 6-year life and after tax cash flows of $98,300 per year. Assume that both projects can be repeated. Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Cotner's WACC is 14 percent. Should the firm replace its old knitting machine, and, if so, which new machine should it use?
1. How do I set-up the problem?
2. What formula, if any, should be used in this problem?
3. Can I perform the problem on a financial calculator or do I need to use Excel?
4. I am not good at doing these problems so whatever can be done to assist would be greatly appreciated.