One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned...

One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $200,000 today. It will be depreciated on a straight-line basis over 5 years, after which it has no salvage value. You expect that the new machine will produce EBITDA (earnings before interest, taxes, depreciation, and amortization) of $100,000 per year for the next 5 years. The current machine is expected to produce EBITDA of $45,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 6 years, after which it will have no salvage value, so depreciation expense for the current machine is $20,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $80,000. Your company’s tax rate is 45%, and the opportunity cost of capital for this type of equipment is 12%. Is it profitable to replace the year-old machine?

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Expert Solution

As the NPV of replacement is positive it is recommended to purchase new equipment

Please dont forget to upvote

jeff jeffy answered 1 year ago

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