One year ago, your company purchased a machine used in manufacturing for $110 000. You have learned that a new machine is available that offers many advantages; you can purchase it for $170 000 today. It will be depreciated on a straight-line basis over ten 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 $50 000 per year for the next ten 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 $10 000 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 11%. Should your company replace its year-old machine?
One year ago, your company purchased a machine used in manufacturing for $110 000. You have learned that a new machine is available that offers many advantages; you can purchase it for $170 000 today. It will be depreciated on a straight-line basis over ten 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 $50 000 per year for the next ten 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 $10 000 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 11%. Should your company replace its year-old machine?
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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![One year ago, your company purchased a machine used in manufacturing for $110 000. You have learned that a new machine is available that offers
many advantages; you can purchase it for $170 000 today. It will be depreciated on a straight-line basis over ten 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 $50 000 per year for the next ten 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 $10 000 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 11%. Should your company replace its year-old machine?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F115d01b5-a50b-4b62-bca8-25c19c12f421%2F682989e9-5221-44ac-884e-dccada962e33%2F2q45xlm_processed.png&w=3840&q=75)
Transcribed Image Text:One year ago, your company purchased a machine used in manufacturing for $110 000. You have learned that a new machine is available that offers
many advantages; you can purchase it for $170 000 today. It will be depreciated on a straight-line basis over ten 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 $50 000 per year for the next ten 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 $10 000 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 11%. Should your company replace its year-old machine?
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