Given that a company which had purchased a machine one year ago at $110,000 came to know that a new machine which offers many advantages can be purchased at present for $150,000 and further the following: The new machine will be depreciated on a straight line basis over 10 years and has no salvage value. The new machine will give an EBITDA (earnings before interest, taxes, depreciation and amortization) every year of $40,000 for 10 years. The machine currently installed which was bought a year ago is being depreciated on a straight line basis over a period of 11 years and produces an EBITDA of $20,000 per year. The present machine will have no salvage value after full depreciation. The present market value or disposal value of the current machine is $50,000. The company’s present income tax rate is 45% and the opportunity cost of capital for this type of equipment is 10% Determine whether it is profitable to replace one-year-old machine.

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Answer 1

Question

Chapter 8, Problem 13P

Summary Introduction

Given that a company which had purchased a machine one year ago at $110,000 came to know that a new machine which offers many advantages can be purchased at present for $150,000 and further the following:

The new machine will be depreciated on a straight line basis over 10 years and has no salvage value.

The new machine will give an EBITDA (earnings before interest, taxes, depreciation and amortization) every year of $40,000 for 10 years.

The machine currently installed which was bought a year ago is being depreciated on a straight line basis over a period of 11 years and produces an EBITDA of $20,000 per year. The present machine will have no salvage value after full depreciation.

The present market value or disposal value of the current machine is $50,000.

The company’s present income tax rate is 45% and the opportunity cost of capital for this type of equipment is 10%

Determine whether it is profitable to replace one-year-old machine.

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Answer 2

Question

Chapter 8, Problem 13P

Summary Introduction

Given that a company which had purchased a machine one year ago at $110,000 came to know that a new machine which offers many advantages can be purchased at present for $150,000 and further the following:

The new machine will be depreciated on a straight line basis over 10 years and has no salvage value.

The new machine will give an EBITDA (earnings before interest, taxes, depreciation and amortization) every year of $40,000 for 10 years.

The machine currently installed which was bought a year ago is being depreciated on a straight line basis over a period of 11 years and produces an EBITDA of $20,000 per year. The present machine will have no salvage value after full depreciation.

The present market value or disposal value of the current machine is $50,000.

The company’s present income tax rate is 45% and the opportunity cost of capital for this type of equipment is 10%

Determine whether it is profitable to replace one-year-old machine.

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Answer 3

Question

Chapter 8, Problem 13P

Summary Introduction

Given that a company which had purchased a machine one year ago at $110,000 came to know that a new machine which offers many advantages can be purchased at present for $150,000 and further the following:

The new machine will be depreciated on a straight line basis over 10 years and has no salvage value.

The new machine will give an EBITDA (earnings before interest, taxes, depreciation and amortization) every year of $40,000 for 10 years.

The machine currently installed which was bought a year ago is being depreciated on a straight line basis over a period of 11 years and produces an EBITDA of $20,000 per year. The present machine will have no salvage value after full depreciation.

The present market value or disposal value of the current machine is $50,000.

The company’s present income tax rate is 45% and the opportunity cost of capital for this type of equipment is 10%

Determine whether it is profitable to replace one-year-old machine.

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Answer 4

Question

Chapter 8, Problem 13P

Summary Introduction

Given that a company which had purchased a machine one year ago at $110,000 came to know that a new machine which offers many advantages can be purchased at present for $150,000 and further the following:

The new machine will be depreciated on a straight line basis over 10 years and has no salvage value.

The new machine will give an EBITDA (earnings before interest, taxes, depreciation and amortization) every year of $40,000 for 10 years.

The machine currently installed which was bought a year ago is being depreciated on a straight line basis over a period of 11 years and produces an EBITDA of $20,000 per year. The present machine will have no salvage value after full depreciation.

The present market value or disposal value of the current machine is $50,000.

The company’s present income tax rate is 45% and the opportunity cost of capital for this type of equipment is 10%

Determine whether it is profitable to replace one-year-old machine.

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Answer 5

Chapter 8, Problem 13P

Summary Introduction

Given that a company which had purchased a machine one year ago at $110,000 came to know that a new machine which offers many advantages can be purchased at present for $150,000 and further the following:

The new machine will be depreciated on a straight line basis over 10 years and has no salvage value.

The new machine will give an EBITDA (earnings before interest, taxes, depreciation and amortization) every year of $40,000 for 10 years.

The machine currently installed which was bought a year ago is being depreciated on a straight line basis over a period of 11 years and produces an EBITDA of $20,000 per year. The present machine will have no salvage value after full depreciation.

The present market value or disposal value of the current machine is $50,000.

The company’s present income tax rate is 45% and the opportunity cost of capital for this type of equipment is 10%

Determine whether it is profitable to replace one-year-old machine.

Answer 6

Chapter 8, Problem 13P

Summary Introduction

Given that a company which had purchased a machine one year ago at $110,000 came to know that a new machine which offers many advantages can be purchased at present for $150,000 and further the following:

The new machine will be depreciated on a straight line basis over 10 years and has no salvage value.

The new machine will give an EBITDA (earnings before interest, taxes, depreciation and amortization) every year of $40,000 for 10 years.

The machine currently installed which was bought a year ago is being depreciated on a straight line basis over a period of 11 years and produces an EBITDA of $20,000 per year. The present machine will have no salvage value after full depreciation.

The present market value or disposal value of the current machine is $50,000.

The company’s present income tax rate is 45% and the opportunity cost of capital for this type of equipment is 10%

Determine whether it is profitable to replace one-year-old machine.

Answer 7

Chapter 8, Problem 13P

Summary Introduction

Given that a company which had purchased a machine one year ago at $110,000 came to know that a new machine which offers many advantages can be purchased at present for $150,000 and further the following:

The new machine will be depreciated on a straight line basis over 10 years and has no salvage value.

The new machine will give an EBITDA (earnings before interest, taxes, depreciation and amortization) every year of $40,000 for 10 years.

The machine currently installed which was bought a year ago is being depreciated on a straight line basis over a period of 11 years and produces an EBITDA of $20,000 per year. The present machine will have no salvage value after full depreciation.

The present market value or disposal value of the current machine is $50,000.

The company’s present income tax rate is 45% and the opportunity cost of capital for this type of equipment is 10%

Determine whether it is profitable to replace one-year-old machine.

Answer 8

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Answer 9

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Answer 11

Ch. 8.1 - How do we forecast unlevered net income?Ch. 8.1 - Prob. 2CC Ch. 8.1 - Prob. 3CC Ch. 8.2 - Prob. 1CC Ch. 8.2 - What is the depreciation tax shield?Ch. 8.3 - Prob. 1CC Ch. 8.3 - Prob. 2CC Ch. 8.4 - Prob. 1CC Ch. 8.4 - What is the continuation or terminal value of a...Ch. 8.5 - Prob. 1CC

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