Mailbox Corp. uses a production machine that costs $13,400 to maintain and will last for 1 more year. A production machine is essential to Mailbox Corp.’s ongoing business. Mailbox Corp. can buy a new production machine for $50,000 that can last the next 6 years and should require maintenance costs of $3,400 a year. a. If the discount rate is 7% APR, compounded annually, what is the NPV of acquiring a new production machine? b. If the discount rate is 7% APR, compounded annually, what is the EAC of acquiring a new production machine? c. If the discount rate is 7% APR, compounded annually, should Mailbox replace the production machine?
a.NPV of new machine = Present value of all cash outflows = 50,000 + 3,400*PVAF(7%, 6 years) = 50,000 + 3,400*4. 7665 = $66,206. 1 Hence, NPV of cost = $66,206. 1 b. EAC = NPV/PVAF = 66,206.1/4. 7665 = $13,889. 88 c. MailBox should not replace the old machine since the cost of maintenance is higher than the cost of the new machine.
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