Question
In: Finance
One year ago, your company purchased a machine used in manufacturing for $95,000. You have learned...
One year ago, your company purchased a machine used in manufacturing for $95,000.
You have learned that a new machine is available that offers many advantages and you can purchase it for $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 $45,000
per year for the next 10 years. The current machine is expected to produce a gross margin of $24,000
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 $8,636 per year. The market value today of the current machine is $60,000. Your company's tax rate is 40%, and the opportunity cost of capital for this type of equipment is 12%.
The NPV of replacing the year-old machine is $ (Round to the nearest dollar.)
Should your company replace its year-old machine? (Y/N)
Solutions
Expert Solution
**Book value of old machine : 95000 - 8636 depreciation for one year = 86364
Loss on sale of old machine = 60000 - 86364 =- 26364
Tax saving due to loss = 26364 * .40 = -10545.6
After tax sale value = 60000-(-10545.6)
= 60000+ 10545.6
= 70545.6
**Depreciation on new machine = 165000/10 = 16500
| Year 0 | 1-10 | |
| Initial investment | -165000 | |
| After tax sale value from old machine | (70545.6) | |
| Incremental gross margin | 21000 [45000-24000] | |
| less :Incremental depreciation | (7864) [16500-8636] | |
| Incremental income before tax | 13136 | |
| less:tax | (5254.4 ) [13136*40%] | |
| Income after tax | 7881.6 | |
| Add:depreciation (non cash) | 7864 | |
| Cash flow | -94454.4 | 15745.6 |
| PVF12%`/PVAF12%` | 1 | 5.65022 |
| Present value of cash flow | -94454.4 | 88966.10 |
NPV = Present value of annual cash flow -Initial cost
= 88966.10 - 94454.4
= - 5488.3 (rounded to - 5488)
b)Since NPV is negative ,old machine should not be replaced.
**Find present value factor and present value annuity factor from their table respectively . at 12%
jeff jeffy answered 1 year agoRelated Solutions
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