Question

In: Finance

One year​ ago, your company purchased a machine used in manufacturing for 100000. You have learned...

One year​ ago, your company purchased a machine used in manufacturing for 100000. You have learned that a new machine is available that offers many advantages and that you can purchase it for 170000 today. The CCA rate applicable to both machines is ​40%; neither machine will have any​ long-term salvage value. You expect that the new machine will produce earnings before​ interest, taxes,​ depreciation, and amortization ​(EBITDA​) of 55000 per year for the next ten years. The current machine is expected to produce EBITDA of 25000 per year. All other expenses of the two machines are identical. The market value today of the current machine is 50000. Your​ company's tax rate is 38%​, and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its​ year-old machine? What is the NPV of​ replacement?

The NPV of replacement is ​?

Solutions

Expert Solution

Answer: The NPV of replacement is 12486.43 positive


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