2. (Incremental cash flows and NPV) The Canton Sundae Corporation is considering the
replacement of an existing machine. The new machine, called an X-tender, would provide
better sundaes, but it costs $120,000. The X-tender requires $20,000 in setup costs that are
expensed immediately and $20,000 in additional working capital. The X-tender’s useful
life is 10 years, after which it can be sold for a salvage value of $40,000. Canton uses
straight-line depreciation, and the machine will be depreciated to a book value of zero on a
six-year basis. Canton has a tax rate of 45% and a 16% cost of capital on projects like this
one. The X-tender is expected to increase revenues minus expenses by $35,000 per year.
What is the NPV of buying the X-tender?
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