One year ago, your company purchased a machine used in manufacturing for $105,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $150,000 today. The CCA rate applicable to both machines is 40%; neither machine will have any long-term salvage value. You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of $40,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $20,000 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 40%, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace its year-old machine? What is the NPV of replacement? The NPV of replacement is $ (Round to the nearest dollar.)
One year ago, your company purchased a machine used in manufacturing for $105,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $150,000 today. The CCA rate applicable to both machines is 40%; neither machine will have any long-term salvage value. You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of $40,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $20,000 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 40%, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace its year-old machine? What is the NPV of replacement? The NPV of replacement 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 $105,000. You have learned that a new machine is
available that offers many advantages and that you can purchase it for $150,000 today. The CCA rate applicable to both machines
is 40%; neither machine will have any long-term salvage value. You expect that the new machine will produce earnings before
interest, taxes, depreciation, and amortization (EBITDA) of $40,000 per year for the next 10 years. The current machine is expected
to produce EBITDA of $20,000 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 40%, and the opportunity cost of capital for this type of equipment is 11%.
Should your company replace its year-old machine?
What is the NPV of replacement?
The NPV of replacement is $
(Round to the nearest dollar.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcebcbc3a-ad31-4075-98e8-afc748c2333a%2Ff49b6f47-aebb-4105-a2b6-1e21918e8e12%2Ft8tc8lqc_processed.png&w=3840&q=75)
Transcribed Image Text:One year ago, your company purchased a machine used in manufacturing for $105,000. You have learned that a new machine is
available that offers many advantages and that you can purchase it for $150,000 today. The CCA rate applicable to both machines
is 40%; neither machine will have any long-term salvage value. You expect that the new machine will produce earnings before
interest, taxes, depreciation, and amortization (EBITDA) of $40,000 per year for the next 10 years. The current machine is expected
to produce EBITDA of $20,000 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 40%, and the opportunity cost of capital for this type of equipment is 11%.
Should your company replace its year-old machine?
What is the NPV of replacement?
The NPV of replacement is $
(Round to the nearest dollar.)
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