In: Finance
One year? ago, your company purchased a machine used in manufacturing for $105,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $160,000 today. The CCA rate applicable to both machines is 20%?; 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 $50,000 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 45%?, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace its? year-old machine?
cash outflow |
Book value of old machine |
84000 |
||||||
cost of new machine |
160000 |
less sale price |
50000 |
|||||
less sale proceeds from the sale of old machine |
50000 |
loss on sale of old machine |
34000 |
|||||
less tax benefit on loss on sale of old machine |
15300 |
tax benefit on loss on sale of old machine |
34000*45% |
15300 |
||||
net cash outflow |
94700 |
|||||||
EBITDA from new machine |
50000 |
depreciation on new machine |
160000*20% |
32000 |
||||
EBITDA from old machine |
23000 |
depreciation on old machine |
105000*20% |
21000 |
||||
differential EBITDA |
27000 |
differential depreciation |
11000 |
|||||
Year |
Differential EBITDA |
less differential depreciation |
EBIT |
less tax 45% |
EAT |
Add depreciation |
EBDAT |
present value of EBDAT = EBDAT/(1+r)^n r= 11% |
1 |
27000 |
11000 |
16000 |
7200 |
8800 |
11000 |
19800 |
17837.84 |
2 |
27000 |
11000 |
16000 |
7200 |
8800 |
11000 |
19800 |
16070.12 |
3 |
27000 |
11000 |
16000 |
7200 |
8800 |
11000 |
19800 |
14477.59 |
4 |
27000 |
11000 |
16000 |
7200 |
8800 |
11000 |
19800 |
13042.87 |
5 |
27000 |
11000 |
16000 |
7200 |
8800 |
11000 |
19800 |
11750.34 |
6 |
27000 |
11000 |
16000 |
7200 |
8800 |
11000 |
19800 |
10585.89 |
7 |
27000 |
11000 |
16000 |
7200 |
8800 |
11000 |
19800 |
9536.837 |
8 |
27000 |
11000 |
16000 |
7200 |
8800 |
11000 |
19800 |
8591.745 |
9 |
27000 |
11000 |
16000 |
7200 |
8800 |
11000 |
19800 |
7740.31 |
10 |
27000 |
11000 |
16000 |
7200 |
8800 |
11000 |
19800 |
6973.253 |
present value of cash inflow |
sum of present value of EBDAT |
116606.8 |
||||||
less net cash outflow |
94700 |
|||||||
NPV |
21906.79 |
|||||||
Yes Machine should be replaced as it results in positive NPV |