Question

One year​ ago, your company purchased a machine used in manufacturing for

$ 105 comma 000$105,000.

You have learned that a new machine is available that offers many advantages and you can purchase it for

$ 140 comma 000$140,000

today. It will be depreciated on a​ straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin​ (revenues minus operating expenses other than​ depreciation) of

$ 35 comma 000$35,000

per year for the next 10 years. The current machine is expected to produce a gross margin of

$ 20 comma 000$20,000

per year. The current machine is being depreciated on a​ straight-line basis over a useful life of 11​ years, and has no salvage​ value, so depreciation expense for the current machine is

$ 9 comma 545$9,545

per year. The market value today of the current machine is

$ 65 comma 000$65,000.

Your​ company's tax rate is

45 %45%​,

and the opportunity cost of capital for this type of equipment is

11 %11%.

Should your company replace its​ year-old machine?

Answer 1