Question:
A company needs to replace its old, fully depreciated sewing machine: two options for replacement. One costs 190,000 with a 3 year expected life with after-tax cash flows (labor savings and depreciation)of 87,000 per year.
The other machine option has a price tag of 360,000 with a 6 year expected life cyclE, generating after-tax cash flows of 98,300 per year. We can assume that both projects can be repeated.
The WACC of this particular company is 14 percent. Should the company replace its old machine and if so with which model option? Show any calculations as necessary.