Problem
Alliance Manufacturing Company is considering the purchase of a new automated drill press to replace an older one. The machine now in operation has a book value of zero and a salvage value of zero. However, it is in good working condition with an expected life of 10 additional years. The new drill press is more efficient than the existing one and, if installed, will provide an estimated cost savings (in labor, materials, and maintenance) of $6,000 per year. The new machine costs $25,000 delivered and installed. It has an estimated useful life of 10 years, and a salvage value of $1,000 at the end of this period. The firm's cost of capital is 14 percent and its marginal income tax rate is 40 percent. The firm uses the straight-line depreciation method.
a. What is the net cash flow in year 0 (that is, initial outlay)?
b. What are the net cash flows after taxes in each of the next 10 years?
c. What is the net present value of the investment?
d. Should Alliance replace its existing drill press?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.