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?
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 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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7269db6a-4594-4e72-bc39-39e538cddd24%2F78f4615e-7bbf-4b3b-b91d-6caff534d844%2Fti1d5sb_processed.jpeg&w=3840&q=75)
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?
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