The Oviedo Company is considering the purchase of a newmachine to replace an obsolete one. The machine being used for the operation has a bookvalue and a market value of zero. However, the machine is in good working order and willlast at least another 10 years. The proposed replacement machine will perform the operationso much more efficiently that Oviedo’s engineers estimate that it will produce after-taxcash flows (labor savings and depreciation) of $8,000 per year. The new machine will cost $45,000 delivered and installed, and its economic life is estimated to be 10 years. It has zerosalvage value. The firm’s WACC is 10%, and its marginal tax rate is 35%. Should Oviedobuy the new machine?
The Oviedo Company is considering the purchase of a new
machine to replace an obsolete 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 10 years. The proposed replacement machine will perform the operation
so much more efficiently that Oviedo’s engineers estimate that it will produce after-tax
cash flows (labor savings and
salvage value. The firm’s WACC is 10%, and its marginal tax rate is 35%. Should Oviedo
buy the new machine?
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