Question

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

$110,000.

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

$170,000

today. It will be depreciated on a​ straight-line basis over ten​ years, after which it has no salvage value. You expect that the new machine will contribute EBITDA​ (earnings before​ interest, taxes,​ depreciation, and​ amortization) of

$60,000

per year for the next ten years. The current machine is expected to produce EBITDA of

$24,000

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

$10,000

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

12%.

Is it profitable to replace the​ year-old machine?

The NPV of the replacement is

​$nothing.

​(Round to the nearest​ dollar.)

Answer 1

Yes it is profitable to replace the machine since its NPV is positive

The NPV of the replacement is $32173