Question

In: Finance

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

One year​ ago, your company purchased a machine used in manufacturing for $ 120 comma 000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $ 160 comma 000 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 $ 40 comma 000 per year for the next 10 years. The current machine is expected to produce EBITDA of $ 24 comma 000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $ 50 comma 000. Your​ company's tax rate is 35 %​, 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 ​$ nothing

Solutions

Expert Solution

We are can calculate the Net Present Value of the Replacement Machinery with the give information

Cost of New Machinery $ 160,000.00
Cost of Old Machinery $ 120,000.00
Rate of Tax 35%
Depreciation Rate (new) 40%
Depreciation Rate (Old) 40%
Cost of Capital 10%
Remaining Value of Old Machine [Cost * (1-40%)] $ 72,000.00
Salvage Value of Machine $ 50,000
EBITDA of New Machine per year $ 40,000
EBITDA of Old Machine per year $ 24,000

The above data can be used in the Excel to calculate the Present Value of the replacement machinery, the details of which are attached in the image below.

Here all the details are provided and with it the NPV of the Replacement Machinery comes out to be -$ 38,520.62.

As the value is negative, the purchase of new machinery will not be beneficial, so the machine should not be replaced.


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