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One year​ ago, your company purchased a machine used in manufacturing for $90,000. You have learned...

One year​ ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $170,000 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 $55,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $22,000 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 $8,182 per year. The market value today of the current machine is $60,000. Your​ company's tax rate is 45%​, and the opportunity cost of capital for this type of equipment is 10%.

Should your company replace its​ year-old machine?

The NPV of replacing the​ year-old machine is ? ​(Round to the nearest​ dollar.)

Should your company replace its​ year-old machine?  ​(Select the best choice​ below.)

A. Yes comma there is a profit from replacing the machine.Yes, there is a profit from replacing the machine.

B. No comma there is a loss from replacing the machine.

Solutions

Expert Solution

NPV will be $ 35724.83

SInce NPV is positive, the old machine shall be replaced.

A   Yes, there is a profit from replacing the machine.

The calculations are shown in the following picture

jeff jeffy answered 1 year ago
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