Problem:

Kaplan Incorporated currently uses an older model BAII plus milling machine that was purchased two years ago for $10,000. The machine would be sold today for $3,000. If the old machine is not replaced, it is expected to operate for another 4 years at which time its salvage value will be $1,200. The BAII plus currently generates revenues of $13,000 per year. The machine has annual operating costs of $8,000 per year. The company maintains an investment of $1,750 in operating net working capital with the old machine.

Kaplan Incorporated is considering acquiring a new milling machine to replace its old milling machine. The new milling machine has a capital cost of $12,000 and an estimated useful life of 4 years and an expected salvage value of $2,000. The company expects the new machine to generate total revenues of $25,000 per year. The new machine would have operating costs of $11,000 per year. With the new machine, the investment in operating net working capital would be increased to $2,500 and remain at this level until the end of the project.

Both machines have a CCA rate of 30%. The company's tax rate is 35%. The project has a required rate of return of 15% per year compounded annually.

What is the NPV of the project, which replaces the old machine with the new machine?

(Note: To get full marks you must show your work. If you are using the table approach you must show the numbers for year 0 to year 4. In addition you must show the calculation or function you used to arrive at the final answer. If you are using the formula, recipe or list approach you must show each step in the approach.)