In: Finance
The Cummings Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has been fully depreciated. The firm does not expect to realize any return from scrapping the old machine in 5 years, but can sell it now for $265,000. The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $145,000. It is expected to reduce overall operating costs by $255,000 every year over the next 5 years.
The company's marginal tax rate is 35 percent and its cost of capital is 13 percent.
Should the firm purchase the new machine?