One year ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $140,000 today. The CCA rate applicable to both machines is 30% ; 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 $50,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $25,000 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 10%. Should your company replace its year-old machine? What is the NPV of replacement? The NPV of replacement is $ Should your company replace its year-old machine? (Round to the nearest dollar) OA. Yes, because a new machine will always be an improvement for the company. OB. No, because the only time a machine should be replaced is when it stops working completely. OC. Yes, because there is a profit from replacing the machine. OD. No, because there is a loss from replacing the machine.
One year ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $140,000 today. The CCA rate applicable to both machines is 30% ; 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 $50,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $25,000 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 10%. Should your company replace its year-old machine? What is the NPV of replacement? The NPV of replacement is $ Should your company replace its year-old machine? (Round to the nearest dollar) OA. Yes, because a new machine will always be an improvement for the company. OB. No, because the only time a machine should be replaced is when it stops working completely. OC. Yes, because there is a profit from replacing the machine. OD. No, because there is a loss from replacing the machine.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:One year ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $140,000 today. The CCA rate applicable to both machines is 30%; 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 $50,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $25,000 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 10%. Should your company replace its year-old machine?
What is the NPV of replacement?
The NPV of replacement is $
Should your company replace its year-old machine?
(Round to the nearest dollar.)
O A. Yes, because a new machine will always be an improvement for the company.
O B. No, because the only time a machine should be replaced is when it stops working completely.
OC. Yes, because there is a profit from replacing the machine.
D. No, because there is a loss from replacing the machine.
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