Question

In: Finance

One year​ ago, your company purchased a machine used in manufacturing for $105 000. You have...

One year​ ago, your company purchased a machine used in manufacturing for $105 000. You have learned that a new machine is available that offers many​ advantages; you can purchase it for $150 000 today. It will be depreciated on a​ straight-line basis over ten years and has no salvage value. You expect that the new machine will produce a gross margin​ (revenues minus operating expenses other than​ depreciation) of $40 000 per year for the next ten years. The current machine is expected to produce a gross margin of $24 000 per year. The current machine is being depreciated on a​ straight-line basis over a useful life of 11​ years, and has no salvage​ value, so depreciation expense for the current machine is $9 545 per year. The market value today of the current machine is $65 000. Your​ company's tax rate is 45%​, and the opportunity cost of capital for this type of equipment is 11%. What is the NPV of replacing the year old machine? Thus, should your company replace its​ year-old machine?

Solutions

Expert Solution

✓ NPV of replacing the old machine is $ 20282.11

✓ Company should replace the it's year old machinery as NPV is positive.

Calculation is given in the below attached images

Please give upvote thank you for that

jeff jeffy answered 2 years ago
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