One year ago, your company purchased a machine used in manufacturing for $100,000. 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 $35,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $20,000 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 $9,091 per year. The market value today of the current machine is $65,000. Your company's tax rate is 38%, and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its year-old machine? The NPV of replacing the year-old machine is $. (Round to the nearest dollar.)
One year ago, your company purchased a machine used in manufacturing for $100,000. 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 $35,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $20,000 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 $9,091 per year. The market value today of the current machine is $65,000. Your company's tax rate is 38%, and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its year-old machine? The NPV of replacing the year-old machine is $. (Round to the nearest dollar.)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 17P: The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will...
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Question
![One year ago, your company purchased a machine used in manufacturing for $100,000. 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 $35,000 per year for the next 10 years. The
current machine is expected to produce a gross margin of $20,000 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 $9,091 per year. The market value today of the current machine is $65,000. Your company's tax rate is 38%,
and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its year-old
machine?
The NPV of replacing the year-old machine is $. (Round to the nearest dollar.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F25110585-49a5-4798-8528-016cbbc9d0de%2F1365613c-7728-48ed-8742-2981f4f75bbc%2Frn1g2mth_processed.jpeg&w=3840&q=75)
Transcribed Image Text:One year ago, your company purchased a machine used in manufacturing for $100,000. 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 $35,000 per year for the next 10 years. The
current machine is expected to produce a gross margin of $20,000 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 $9,091 per year. The market value today of the current machine is $65,000. Your company's tax rate is 38%,
and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its year-old
machine?
The NPV of replacing the year-old machine is $. (Round to the nearest dollar.)
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