Question

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

$120,000.

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

$160,000

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

$35,000

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

$23,000

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

$10,909

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

$60,000.

Your​ company's tax rate is

35%​,

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

12%.

Should your company replace its​ year-old machine?

Answer 1

*Since NPV is Negative The company should not replace the machine