Emerson, Inc. is evaluating whether to replace a machine. The current machine was purchased 3years ago for $6,000 and falls into the MACRS 3-year class. It has 3 years of remaining life and a$600 salvage value three years from now. The current market value of the older machine is$2,000.Alternatively, the company could purchase a new machine for $11,600. Delivery of the newmachine would cost $200 and installation would cost $200. The new machine is expected toincrease inventory needs by $800, and accounts payable is expected to increase by $600. Thenew machine falls in the MACRS 3-year class, has a 3-year economic life and a salvage value atthe end of 3 years of $7,000. It is expected to increase revenue by $3,500 per year and isexpected to decrease costs by $2,500 per year. The firm has a 40 % tax rate and a cost of capitalof 12%. The MACRS 3-year class uses the following percentages: 33%, 45%, 15%, and 7% (inthat order). (Round all CFs to the nearest dollar.)Should the firm replace its older machine with the new machine?A. Yes, the NPV is + $4,428.B. Yes, the NPV is + $4,676.C. Yes, the NPV is + $4,809.D. Yes, the NPV is +$5,023.E. Yes, the NPV is +$5,263.

NPV is also known as Net Present Value. It is a capital budgeting techniques which help in decision…

Answered: Emerson, Inc. is evaluating whether to…

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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