Question

In: Finance

One year? ago, your company purchased a machine used in manufacturing for $105,000. You have learned...

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?

Solutions

Expert Solution

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


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