One year ago, your company purchased a machine used in manufacturing for $100,000. You have learned that a new nachine 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 or 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?
One year ago, your company purchased a machine used in manufacturing for $100,000. You have learned that a new nachine 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 or 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?
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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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.)
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