# Investment

O’Dell Enterprises manufactures lenses for telescopes. O’Dell is considering replacing a machine that grinds lenses and has received a proposal from a vendor for the new lens grinder. O’Dell has a 12 percent cost of capital and a 30 percent tax rate. The vendor will sell the company a new machine for \$310,000 and buy the old machine, which has a \$20,000 book value, for \$30,000. The new machine is expected to generate \$80,000 of pretax cash inflows, and the company calculates depreciation expense uniformly over its five-year life.

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A. Calculate the net present value of the new machine.

In 2011 the Tricola Company is considering whether to replace its old de-icer with a more efficient deicer that costs \$100,000. The old de-icer has a book value of \$16,000 and can be sold for \$20,000. The new de-icer will save \$28,000 of operating cash flows before taxes in each of the next five years. Tricola will take \$20,000 of depreciation in each of the next five years. It has a 30 percent tax rate and a 14 percent cost of capital. Calculate the NPV of this potential investment.

Should Tricola buy the new de-icer?

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