Q2b. Knives Out Co. is considering when to replace its old machine. The company faces 2 options: (1) replace the old machine now, or (2) replace it at the end of six years. Currently, the old machine has a salvage value of $3 million and a book value of $1.5 million. If the machine is not sold, it will require maintenance costs of $775,000 over the next six years at the end of the year. The depreciation expense for the machine is $300,000 per year. At the end of six years, the machine will have a salvage value of only $100,000 and a book value of $0. If the company replaces the old machine now, the new machine will cost $4.8 million and will require maintenance costs of $320,000 at the end of each year during its economic life of six years. At the end of six years, the new machine will have a salvage value of $900,000. It will be fully depreciated by the straight-line method. If Knives out to replace the old machine in six years, a replacement machine will cost $3.4 million. The company will need to purchase this machine regardless of its choice today. The corporate tax rate is 21% and the appropriate discount rate is 7.5%. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should Knives Out Co. replace the old machine now or at the end of six years?
Q2b. Knives Out Co. is considering when to replace its old machine. The company faces 2 options: (1) replace the old machine now, or (2) replace it at the end of six years. Currently, the old machine has a salvage value of $3 million and a book value of $1.5 million. If the machine is not sold, it will require maintenance costs of $775,000 over the next six years at the end of the year. The depreciation expense for the machine is $300,000 per year. At the end of six years, the machine will have a salvage value of only $100,000 and a book value of $0.
If the company replaces the old machine now, the new machine will cost $4.8 million and will require maintenance costs of $320,000 at the end of each year during its economic life of six years. At the end of six years, the new machine will have a salvage value of $900,000. It will be fully
If Knives out to replace the old machine in six years, a replacement machine will cost $3.4 million. The company will need to purchase this machine regardless of its choice today. The corporate tax rate is 21% and the appropriate discount rate is 7.5%. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should Knives Out Co. replace the old machine now or at the end of six years?
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