A company is thinking when to replace its old machine. It has two choices: replace the old machine now, or replace it at the end of seven years. Currently, the old machine has a salvage value of $3 million and book value of $1.5 million. If it is not sold, it will require maintenance costs of $770,000 at the end of the year over the nextsix years. The depreciation expense for the machine is $300,000 per year. At the end of six years, the machine will have a salvage value of only $100,000 and a book value of $0. If the company replaces the old machine now, the new machine will cost $4.9 million and will require maintenance costs of $320,000 at the end of each year during its six years economic life. At the end of six years, the new machine will have a salvage value of $900,000. It willbe fully depreciated using the straight-line method. If the company replaces the old machine in six years, a new machine will cost $3.5 million. The company will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 21% and the discount rate is 7.5%. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should the company replace the old machine now or at the end of six years?
A company is thinking when to replace its old machine. It has two choices: replace the old machine now, or replace it at the end of seven years. Currently, the old machine has a salvage value of $3 million and book value of $1.5 million. If it is not sold, it will require maintenance costs of $770,000 at the end of the year over the nextsix years. The depreciation expense for the machine is $300,000 per year. At the end of six years, the machine will have a salvage value of only $100,000 and a book value of $0. If the company replaces the old machine now, the new machine will cost $4.9 million and will require maintenance costs of $320,000 at the end of each year during its six years economic life. At the end of six years, the new machine will have a salvage value of $900,000. It willbe fully depreciated using the straight-line method. If the company replaces the old machine in six years, a new machine will cost $3.5 million. The company will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 21% and the discount rate is 7.5%. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should the company replace the old machine now or at the end of six years?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
A company is thinking when to replace its old machine. It has two choices: replace the old machine now, or replace it at the end of seven years. Currently, the old machine has a salvage value of $3 million and book value of $1.5 million. If it is not sold, it will require maintenance costs of $770,000 at the end of the year over the next
six years. The depreciation expense for the machine is $300,000 per year. At the end of six years, the machine will have a salvage value of only $100,000 and a book value of $0. If the company replaces the old machine now, the new machine will cost $4.9 million and will require maintenance costs of $320,000 at the end of each year during its six years economic life. At the end of six years, the new machine will have a salvage value of $900,000. It will
be fullydepreciated using the straight-line method. If the company replaces the old machine in six years, a new machine will cost $3.5 million. The company will need to purchase this machine regardless of what choice it makes
six years. The depreciation expense for the machine is $300,000 per year. At the end of six years, the machine will have a salvage value of only $100,000 and a book value of $0. If the company replaces the old machine now, the new machine will cost $4.9 million and will require maintenance costs of $320,000 at the end of each year during its six years economic life. At the end of six years, the new machine will have a salvage value of $900,000. It will
be fully
today. The corporate tax rate is 21% and the discount rate is 7.5%. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should the company replace the old machine now or at the end of six years?
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