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; you can purchase it for $140,000 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 $45,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $24,000 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 $9,090.91 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 30%, and the opportunity cost of capital for this type of equipment is 15%. Is it profitable to replace the year-old machine? The NPV of the replacement is (Round to the nearest cent)
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; you can purchase it for $140,000 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 $45,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $24,000 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 $9,090.91 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 30%, and the opportunity cost of capital for this type of equipment is 15%. Is it profitable to replace the year-old machine? The NPV of the replacement is (Round to the nearest cent)
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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