In: Accounting
One year ago, your company purchased a machine used in manufacturing for
$ 110 comma 000$110,000.
You have learned that a new machine is available that offers many advantages and you can purchase it for
$ 165 comma 000$165,000
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
$ 45 comma 000$45,000
per year for the next 10 years. The current machine is expected to produce a gross margin of
$ 21 comma 000$21,000
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 comma 000$10,000
per year. The market value today of the current machine is
$ 60 comma 000$60,000.
Your company's tax rate is
40 %40%,
and the opportunity cost of capital for this type of equipment is
10 %10%.
Should your company replace its year-old machine?