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 $155,000 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 $24,000 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 40%, 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 $155,000 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 $24,000 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 40%, 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...
Related questions
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 $155,000 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 $24,000 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 40%, 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%2Fd8853ebd-4705-4c72-9db9-bab999b0e26a%2F435082fd-b0ee-4629-8220-023161453fa7%2Fcadrkj_processed.png&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 $155,000 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 $24,000 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 40%, 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.)
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Recommended textbooks for you
![Intermediate Financial Management (MindTap Course…](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Fundamentals Of Financial Management, Concise Edi…](https://www.bartleby.com/isbn_cover_images/9781337902571/9781337902571_smallCoverImage.jpg)
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
![Intermediate Financial Management (MindTap Course…](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Fundamentals Of Financial Management, Concise Edi…](https://www.bartleby.com/isbn_cover_images/9781337902571/9781337902571_smallCoverImage.jpg)
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)