Question

One year​ ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $155,000 today. It will be depreciated on a​ straight-line basis over 10 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 $60,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $22,000 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 $10,000 per year. The market value today of the current machine is $45,000. Your​ company's tax rate is 42 %​ and the opportunity cost of capital for this type of equipment is 10%.

Should your company replace its​ year-old machine?

The NPV of replacing the​ year-old machine is ___?

Answer 1

Solution:

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
New Machine NPV
Investment	(155,000)
Net Sale proceed (sale+ tax saving)	68100
= 45,000 + (100,000 - 45000)*42%
Net Operating Income		60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000	60,000
Depreciation		15,500	15,500	15,500	15,500	15,500	15,500	15,500	15,500	15,500	15,500
Income before tax (Operating Income - Dep.)		44,500	44,500	44,500	44,500	44,500	44,500	44,500	44,500	44,500	44,500
Tax @ 42% on Income		18,690	18,690	18,690	18,690	18,690	18,690	18,690	18,690	18,690	18,690
Income after tax (Income - Tax)		25,810	25,810	25,810	25,810	25,810	25,810	25,810	25,810	25,810	25,810
Depreciation		15,500	15,500	15,500	15,500	15,500	15,500	15,500	15,500	15,500	15,500
Cash Flow (Income after tax+ Dep.)		41,310	41,310	41,310	41,310	41,310	41,310	41,310	41,310	41,310	41,310
Net Cash Flow (investment + annual cash flow)	(86,900)	41,310	41,310	41,310	41,310	41,310	41,310	41,310	41,310	41,310	41,310
Discounting Factor @ 10%	1.0000	0.9091	0.8264	0.7513	0.6830	0.6209	0.5645	0.5132	0.4665	0.4241	0.3855
NPV year wise	(86,900.00)	37,554.55	34,140.50	31,036.81	28,215.29	25,650.26	23,318.42	21,198.56	19,271.42	17,519.47	15,926.79
Gross NPV	166,932.07
Old Machine NPV
Investment	-
Net Operating Income		22,000	22,000	22,000	22,000	22,000	22,000	22,000	22,000	22,000	22,000
Depreciation		10,000	10,000	10,000	10,000	10,000	10,000	10,000	10,000	10,000	10,000
Income before tax (Operating Income - Dep.)		12,000	12,000	12,000	12,000	12,000	12,000	12,000	12,000	12,000< ekkarill92 Next > < Previous Related Solutions One year​ ago, your company purchased a machine used in manufacturing for $110,000. You have learned... One year​ ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $155,000 today. It will be depreciated on a​ straight-line basis over 10 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 $60000 per year for the next 10 years. The current machine... One year​ ago, your company purchased a machine used in manufacturing for $110,000. You have learned... One year​ ago, your company purchased a machine used in manufacturing for $110,000. 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