Question
In: Finance
Granite Solutions manufactures high-end kitchen counters. They are considering replacing a machine used in manufacturing with...
Granite Solutions manufactures high-end kitchen counters. They are considering replacing a machine used in manufacturing with a newer, more efficient model. The new machine costs $400,000 and will be used for 6 years, at which point its salvage value will be $80,000. Their current machine was purchased for $250,000 eight years ago. Granite Solutions can sell their current machine for $130,000 today or for $8,000 at the end of 6 years.
The firm's marginal tax rate is 41% and the firm's WACC is 12%. The CCA rate is 28% and the asset pool will remain open.
Required: Calculate the net present value of replacing the machine. Should the firm replace the machine?
Solutions
Expert Solution
NPV of purchasing the machine is $ 287,870.
Decision on whether the machine should be replaced or not can be only be made if the cashflows on account of new machine are available. In case there are no additional cash flows due to replacement of machinery, the machinery should not be replaced.
jeff jeffy answered 1 year agoRelated Solutions
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Toshiba Inc. is considering replacing a machine. These are the data for both the used and...
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purchased 2 yrs ago, it was to have zero salvage value at the end
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Havoc Industries is considering replacing a machine that is presently used in its production process. What...
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result of the differential analysis?
Old Machine
Replacement
Machine
Original cost
$55,000
$45,000
Remaining useful life in years
5
5
Current age in years
5
0
Book value
$33,000
Current disposal value in cash
$10,000
Future disposal value in cash (in 5 years)
$0
$0
Annual cash operating costs
$8,000
$4,000
($23,000)
$35,000
($15,000)
$15,000
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Annual depreciation
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8,900
Annual manufacturing costs,
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23,600
Annual non-manufacturing operating
expenses
6,100
Annual revenue
74,200
Current estimated selling price of
machine
29,700
New Machine
Purchase price...
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The cost of the new machine ($1 million) will be depreciated over
the 5 years life of the project using the...
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