One year ago, your company purchased a machine used in manufacturing for $110.000 You have leamed that a new machine is available that offers many advantages and that you can purchase it for $160,000 today. The CCA rate applicable to both machines is 20%; 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 $45,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $21,000 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 30% and the opportunity cost of capital for this type of equipment is 12% Should your company replace its year-old machine?
One year ago, your company purchased a machine used in manufacturing for $110.000 You have leamed that a new machine is available that offers many advantages and that you can purchase it for $160,000 today. The CCA rate applicable to both machines is 20%; 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 $45,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $21,000 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 30% and the opportunity cost of capital for this type of equipment is 12% Should your company replace its year-old machine?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
H2.
Transcribed Image Text:One year ago, your company purchased a machine used in manufacturing for $110.000. You have leamed that a new machine is available that offers many advantages and that you
can purchase it for $160,000 today. The CCA rate applicable to both machines is 20%, 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 $45,000 per year for the next 10 years. The current machine is expected to produce EBITDA of
$21,000 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 30%, and the
opportunity cost of capital for this type of equipment is 12%. Should your company replace its year-old machine?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education