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

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 $ 170, 000 today. It will be depreciated on a? straight-line basis over ten? years, after which it has no salvage value. You expect that the new machine will contribute EBITDA? (earnings before? interest, taxes,? depreciation, and? amortization) of $ 50, 000 per year for the next ten years. The current machine is expected to produce EBITDA of $ 24, 000 per year. The current machine is being depreciated on a? straight-line basis over a useful life of 11? years, after which it will have no salvage? value, so depreciation expense for the current machine is $ 10, 909 per year. All other expenses of the two machines are identical. The market value today of the current machine is $ 50,000. Your? company's tax rate is 45 %?, and the opportunity cost of capital for this type of equipment is 10 %. Is it profitable to replace the? year-old machine? The NPV of the replacement is ?$ ____ ?(Round to the nearest? dollar.)

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Expert Solution

Statement showing NPV

Particulars 0 1 2 3 4 5 6 7 8 9 10 NPV
Cost of new machine -170000
Salvage value of old machine
(50000)+45%(109091-50000)
50000+26590.95		 52659.95
Incremental EBITDA(50000-24000) 26000 26000 26000 26000 26000 26000 26000 26000 26000 26000
Incremental depreciation(17000 6091 6091 6091 6091 6091 6091 6091 6091 6091 6091
PBT 19909 19909 19909 19909 19909 19909 19909 19909 19909 19909
Tax @ 45% 8959.05 8959.05 8959.05 8959.05 8959.05 8959.05 8959.05 8959.05 8959.05 8959.05
PAT 10949.95 10949.95 10949.95 10949.95 10949.95 10949.95 10949.95 10949.95 10949.95 10949.95
Add: depreciation 6091 6091 6091 6091 6091 6091 6091 6091 6091 6091
Annual cash flow 17040.95 17040.95 17040.95 17040.95 17040.95 17040.95 17040.95 17040.95 17040.95 17040.95
Total cash flow -117340.05 17040.95 17040.95 17040.95 17040.95 17040.95 17040.95 17040.95 17040.95 17040.95 17040.95
PVIF @ 10% 1 0.909091 0.826446 0.751315 0.683013 0.620921 0.564474 0.513158 0.466507 0.424098 0.385543
Present value -117340.05 15491.77 14083.43 12803.12 11639.2 10581.09 9619.172 8744.702 7949.729 7227.026 6570.024 -12630.8

Thus he should not change the machine

jeff jeffy answered 2 years ago
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