One year ago, your company purchased a machine used in manufacturing for $95,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $50,000 per year for the next 10 years The current machine is expected to produce EBITDA of $25,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $8,636 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% Is it profitable to replace the year-old machine?
One year ago, your company purchased a machine used in manufacturing for $95,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $50,000 per year for the next 10 years The current machine is expected to produce EBITDA of $25,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $8,636 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% Is it profitable to replace the year-old 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
Related questions
Question
9
Transcribed Image Text:One year ago, your company purchased a machine used in manufacturing for $95,000. You have learned that a new
machine is available that offers many advantages, you can purchase it for $160,000 today. It will be depreciated on
a straight-line basis over 10 years, after which it has no salvage value You expect that the new machine will contribute
EBITDA (earnings before interest, taxes, depreciation, and amortization) of $50,000 per year for the next 10 years
The current machine is expected to produce EBITDA of $25,000 per year. The current machine is being depreciated
on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense
for the current machine is $8,636 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%. Is it profitable to replace the year-old machine?
The NPV of the replacement is $
5
*****
5
ä
FINN
522
75
N
RUBRE
(Round to the nearest cent.)
324
O
31444
2337
DES
94
1989
45
D
ww
wew
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education