One year ago, your company purchased a machine used in manufacturing for $ 105 comma 000. You have learned that a new machine is available that offers many advantages; you can purchase it for $ 170 comma 000 today. It will be depreciated on a straight-line basis over ten 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 $ 60 comma 000 per year for the next ten years. The current machine is expected to produce EBITDA of $ 20 comma 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 $ 9 comma 545 per year. All other expenses of the two machines are identical. The market value today of the current machine is $ 50 comma 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 year-old machine?
One year ago, your company purchased a machine used in manufacturing for $ 105 comma 000. You have learned that a new machine is available that offers many advantages; you can purchase it for $ 170 comma 000 today. It will be
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
