Question:
Cotner Clothes Inc. is considering the replacement of it 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; and Machine 360-6 which has a cost of $360,000, a 6 year life, and after-tax cash flows of $98,000 per year. Assume that both projects can be repeated. Knitting machine prices are not expected to rise, because inflation will e offet 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?