Considering the replacement of its old

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Reference no: EM13807937

Coiner Clothes Inc. is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: (a) 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 per year; and (b) Machine 360-6, which have a cost of $360,000 a 6-year life, and after-tax cash flows of $98,300 per year. Assume both projects can be repeated. Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Costner’s cost of capital is 14%. Should the firm replace its old knitting machine, and, if so, which new machine should it use? Please show all work.

Reference no: EM13807937

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