In: Finance
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?
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.