The Orange Goat Company is considering the purchase of a new machine to replace an inefficient one. The machine being used for the operation has a book value and a market value of zero. However, the machine is in good working order and will last at least another 7 years. The proposed replacement machine will perform the operation so much more efficiently that OG's engineers estimate that it will produce after-tax cash flows (labor savings) of $12,500 per year. The after-tax cost of the new machine is $75,000, and its economic life is estimated to be 7 years. It has zero salvage value. The firm's WACC is 8%, and its marginal tax rate is 20%. Should the Orange Goat buy the new machine?
The Orange Goat Company is considering the purchase of a new machine to replace an inefficient one. The machine being used for the operation has a book value and a market value of zero. However, the machine is in good working order and will last at least another 7 years. The proposed replacement machine will perform the operation so much more efficiently that OG's engineers estimate that it will produce after-tax cash flows (labor savings) of $12,500 per year. The after-tax cost of the new machine is $75,000, and its economic life is estimated to be 7 years. It has zero salvage value. The firm's WACC is 8%, and its marginal tax rate is 20%. Should the Orange Goat buy the new 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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Question 40
The Orange Goat Company is considering the purchase of a new machine to replace an inefficient
one. The machine being used for the operation has a book value and a market value of zero.
However, the machine is in good working order and will last at least another 7 years. The proposed
replacement machine will perform the operation so much more efficiently that OG's engineers
estimate that it will produce after-tax cash flows (labor savings) of $12,500 per year. The after-tax
cost of the new machine is $75,000, and its economic life is estimated to be 7 years. It has zero
salvage value. The firm's WACC is 8%, and its marginal tax rate is 20%.
Should the Orange Goat buy the new machine?
No, the new machine will cannibalize the old one
Yes, the machine should be discounted making the NPV positive to $5,080
Yes, the labor savings create a positive value of $12,500 per year
None of these are correct, Al and Machine Learning are taking over the world
O No, the NPV is -$9,920, which is negative, and therefore should not buy it
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