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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100%
The NPV of the replacement is $ ?

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; you can purchase it for $140,000 today. It will be depreciated on a straight-line basis over ten
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 $60,000 per year for the next ten years. The current machine is expected to produce EBITDA of
$22,000 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 $8,182 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 42%, 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 $
(Round to the nearest dollar.)
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