One year ago, your company purchased a machine used in manufacturing for $105,000. You have learned that a new machine isavailable that offers many advantages and that you can purchase it for $150,000 today. The CCA rate applicable to both machinesis 40%; neither machine will have any long-term salvage value. You expect that the new machine will produce earnings beforeinterest, taxes, depreciation, and amortization (EBITDA) of $40,000 per year for the next 10 years. The current machine is expectedto produce EBITDA of $20,000 per year. All other expenses of the two machines are identical. The market value today of thecurrent machine is $50,000. Your company's tax rate is 40%, and the opportunity cost of capital for this type of equipment is 11%.Should your company replace its year-old machine?What is the NPV of replacement?The NPV of replacement is $(Round to the nearest dollar.)

Old machine cost = $105,000New machine cost = $150,000CCA = 40%, tax rate = 40%EBITDA for old…

Answered: One year ago, your company purchased a…

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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One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $40,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $25,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $10,909 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your company's tax rate is 20%, and the opportunity cost of capital for this type of equipment is 10%. Is it profitable to replace the…
Nguyen Company has an opportunity to purchase an asset that will cost company $59,000. The asset is expected to add $23,000 per year to the company’s net income. Assuming the asset has a five-year useful life and zero salvage value, the unadjusted rate of return based on the average investment will be ?
One year ago, your company purchased a machine used in manufacturing for $95,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $40,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $25,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is $8,636 per year. The market value today of the current machine is $45,000. Your company's tax rate is 35%, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace its year-old machine? The NPV of replacing the year-old machine is $ (Round to the…
XYZ Company has an opportunity to purchase and asset that will cost the company $60,000. The asset is expected to add $12,000 per year to the company’s net income. Assuming the asset has a 5-year useful life and a zero salvage value, the unadjusted rate of return will be?
6
Ilana Industries Incorporated needs a new lathe. It can buy a new high-speed lathe for $1 million. The lathe will cost $35,000 per year to run, but it will save the firm $125,000 in labor costs and will be useful for 10 years. Suppose that, for tax purposes, the lathe is entitled to 100% bonus depreciation. At the end of the 10 years, the lathe can be sold for $100,000. The discount rate is 8%, and the corporate tax rate is 21%. What is the NPV of buying the new lathe? Note: A negative amount should be indicated by a minus sign. Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.
You purchased a machine for $1.17 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 38%. If you sell the machine today (after three years of depreciation) for $788,000, what is your incremental cash flow from selling the machine?
One year ago, your company purchased a machine used in manufacturing for $105,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $150,000 today. The CCA rate applicable to both machines is 20%; neither machine will have any long-term salvage value. You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of $45,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $22,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your company's tax rate is 35%, and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its year-old machine? What is the NPV of replacement? The NPV of replacement is $ (Round to the nearest dollar.) .....
One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $160,000 today. The CCA rate applicable to both machines is 40%; neither machine will have any long-term salvage value. You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of $40,000 per year for the next ten years. The current machine is expected to produce EBITDA of $23,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your company's tax rate is 45%, and the opportunity cost of capital for this type of equipment is 12%. Should your company replace its year-old machine? What is the NPV of replacement?
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Lowell Inc. is thinking about replacing an old computer with a new one. The new one will cost $1,000,000 and will have a life of FOUR years. The new computer qualifies as 5-year MACRS property. Years 1 2 3 4 Depreciation rate 20% 32% 19% 12% It will probably be worth about $330,000 after FOUR years. The old computer is being depreciated at a rate of $100,000 per year. It will be completely written off in FOUR years, at that time it will have zero resale value. We can sell it now for $410,000 after taxes. The new machine will save us $200,000 per year in operating costs. The tax rate (federal plus state) is 25 percent and WACC is 8 percent. What is the TOTAL FREE CASH FLOW FOR YEAR 4? Free cash flow = Total Initial Investment + Total annual project CF + Total Salvage Value 480,000 467,500 445,000 422,500

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