One year ago, your company purchased amachine used in manufacturing for $120,000. Youhave learned that a new machine is available thatoffers many advantages; you can purchase it for$150,000 today. It will be depreciated on astraight-line basis over ten years, after which it hasno salvage value. You expect that the newmachine will contribute ÉBITDA (earnings beforeinterest, taxes, depreciation, and amortization) of$60,000 per year for the next ten years. Thecurrent machine is expected to produce EBITDA of$25,000 per year. The current machine is beingdepreciated on a straight-line basis over a usefullife of 11 years, after which it will have no salvagevalue, so depreciation expense for the currentmachine is $10,909 per year. All other expenses ofthe two machines are identical. The market valuetoday of the current machine is $50,000. Yourcompany's tax rate is 38%, and the opportunitycost of capital for this type of equipment is 11%.What is the NPV of the replacement and is itprofitable to replace the year-old machine?

NPV replacement analysis can be done as follows in excel :

Answered: achine is expected to p er year. The…

Business

Finance

achine is expected to p er year. The current ma d on a straiaht-line ba

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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Concord Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $95,000 for the machine, which was state of the art at the time of purchase. Although the machine will likely last another ten years, it will need a $12,000 overhaul in four years. More important, it does not provide enough capacity to meet customer demand. The company currently produces and sells 9,000 frames per year, generating a total contribution margin of $92,500. Martson Molders currently sells a molding machine that will allow Concord Pix to increase production and sales to 12,000 frames per year. The machine, which has a ten-year life, sells for $135,000 and would cost $10,000 per year to operate. Concord Pix's current machine costs only $8,000 per year to operate. If Concord Pix purchases the new machine, the old machine could be sold at its book value of $5,000. The new machine is expected to have a salvage value of $19,900 at the end of its ten-year life. Concord…
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