Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 43

Machine Replacement with Tax Considerations; Spreadsheet Application A computer chip manufacturer spent $2,500,000 to develop a special-purpose molding machine. The machine has been used for one year and will be obsolete after an additional three years. The company uses straight-line (SL) depreciation for this machine.
At the beginning of the second year, a machine salesperson offers a new, vastly more efficient machine. It will cost $2,000,000, reduce annual cash manufacturing costs from $1,800,000 to $1,000,000, and have zero disposal value at the end of three years. Management has decided to use the double-declining-balance depreciation method for tax purposes for this machine if purchased. ( Note : Make sure to switch to SL depreciation in year 3 to ensure that the entire cost is written off. You may find it useful to use the VDB function in Excel to calculate depreciation charges.)
The old machine's salvage value is $300,000 now and will be $50,000 three years from now; however, no salvage value is provided in calculating straight-line depreciation on the old machine for tax purposes. The firm's income tax rate is 45%. The firm desires to earn a minimum after-tax rate of return of 8%.
Required Using the net present value (NPV) technique, show whether the firm should purchase the new machine. ( Note: Use the PV and NPV functions in Excel to calculate all present value amounts.)