One year ago, your company purchased a machine used in manufacturing for $115,000.You have learned that a new machine is available that offers many advantages and you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over 10 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 $35,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $24,000 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 $10,455 per year. The market value today of the current machine is $55,000. Your company's tax rate is 35%, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace its year-old machine? The NPV of replacing the year-old machine is $_____ (Round to the nearest dollar.) Should your company replace its year-old machine? (Select the best choice below.) - Yes there is a profit from replacing the machine - No there is a loss from replacing the machine

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 10P: REPLACEMENT ANALYSIS The Dauten Toy Corporation currently uses an injection molding machine that was...

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One year ago, your company purchased a machine used in manufacturing for $115,000.You have learned that a new machine is available that offers many advantages and you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over 10 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 $35,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $24,000 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 $10,455 per year. The market value today of the current machine is $55,000.
Your company's tax rate is 35%, and the opportunity cost of capital for this type of equipment is 11%.

Should your company replace its year-old machine?

The NPV of replacing the year-old machine is

$_____

(Round to the nearest dollar.)

Should your company replace its year-old machine?

(Select the best choice below.)

- Yes there is a profit from replacing the machine

- No there is a loss from replacing the machine

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