One year? ago, your company purchased a machine used in manufacturing for $90,000. You have learned...

One year? ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $150,000 today. The CCA rate applicable to both machines is 30%?; 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 $60,000 per year for the next ten years. The current machine is expected to produce EBITDA of $23,000 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 42%?, and the opportunity cost of capital for this type of equipment is 11%. What is the NPV of replacement?

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Expert Solution

Statement showing depreciation on old machine

Year	Opening balance	Depreciation	Closing balance
1	76500	22950	53550
2	53550	16065	37485
3	37485	11246	26240
4	26240	7872	18368
5	18368	5510	12857
6	12857	3857	9000
7	9000	2700	6300
8	6300	1890	4410
9	4410	1323	3087
10	3087	926	2161

Statement showing depreciation on one machine

Year	Opening balance	Depreciation	Closing balance
1	150000	22500	127500
2	127500	38250	89250
3	89250	26775	62475
4	62475	18743	43733
5	43733	13120	30613
6	30613	9184	21429
7	21429	6429	15000
8	15000	4500	10500
9	10500	3150	7350
10	7350	2205	5145

Statement showing incremental depreciation

Year	Old Depreciation	New Depreciation	Incremental
1	22950	22500	-450
2	16065	38250	22185
3	11246	26775	15529
4	7872	18743	10871
5	5510	13120	7610
6	3857	9184	5327
7	2700	6429	3729
8	1890	4500	2610
9	1323	3150	1827
10	926	2205	1279

Statement hsowing NPV

Particulars	0	1	2	3	4	5	6	7	8	9	10	Total
Incremental Cost ( 150000- 61130)	-88870
Incremental EBITDA		37000	37000	37000	37000	37000	37000	37000	37000	37000	37000
Incremental Depreciation		-450	22185	15529	10871	7610	5327	3729	2610	1827	1279
PBT		37450	14815	21471	26129	29390	31673	33271	34390	35173	35721
Tax @ 42%		15729	6222	9018	10974	12344	13303	13974	14444	14773	15003
PAT		21721	8593	12453	15155	17046	18370	19297	19946	20400	20718
Add: Depreciation		-450	22185	15529	10871	7610	5327	3729	2610	1827	1279
Cash flow		21271	30778	27982	26026	24656	23697	23026	22556	22227	21997
Toatl cash flow	-88870	21271	30778	27982	26026	24656	23697	23026	22556	22227	21997
PVIF @ 11%	1	0.9009	0.8116	0.7312	0.6587	0.5935	0.5346	0.4817	0.4339	0.3909	0.3522
Present value	-88870	19163	24980	20460	17144	14632	12670	11091	9788	8689	7747	57494

Statement showing Cash inflow on sale of old machine

Particulars	Amount
Salvage value of old machine	50000
Book value	76500
Loss	26500
Tax savings @ 42%	11130
Cash inflow	61130

jeff jeffy answered 1 year ago

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