PFE, Chapter 3: Capital budgeting 52
The discount rate of "Car Clean" is 15% and the corporate tax rate is 40%. What is the NPV of
replacing the old machine?
13. A company is considering whether to buy a regular or color photocopier for the office. The
cost of the regular machine is $10,000, its life span is 5 years and the company has to pay
another $1,500 annually in maintenance costs. The color photocopier’s price is $30,000, its life
span is also 5 years and the annual maintenance costs are $4,500. The color photocopier is
expected to increase the revenue of the office by $8,500 annually. Assume that the company is
profitable and pays 40% corporate tax, the relevant interest rate is 11%. Which photocopy
machine should the firm buy?
14. The Coka company is a soft drink company. Until today the company bought empty cans
from an outside supplier that charges Coka $0.20 per can. In addition the transportation cost is
$1,000 per truck that transports 10,000 cans. The Coka company is considering whether to start
manufacturing cans in its plant. The cost of a can machine is $1,000,000 and its life span is 12
years. The terminal value of the machine is $160,000. Maintenance and repair costs will be
$150,000 for every 3 year period. The additional space for the new operation will cost the
company $100,000 annually. The cost of producing a can in the factory is $0.17.
The cost of capital of Coka is 11% and the corporate tax rate is 40%.
a) What is the minimum number of cans that the company has to sell annually in order to
justify self-production of cans?
b) Advanced: Use data tables in order to show the NPV and IRR of the project as a
function of the number of cans.