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?

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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

jeff jeffy answered 1 year ago

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