Pilot Plus Pens is deciding when to replace its old machine. The machines current salvage value is

Question:

Pilot Plus Pens is deciding when to replace its old machine. The machine’s current is $1.8 million. Its current book value is $1.1 million. If not sold, the old machine will require maintenance costs of $750,000 at the end of the year for the next five years. Depreciation on the old machine is $220,000 per year. At the end of five years, it will have a of $175,000 and a book value of $0. A replacement machine costs $4.2 million now and requires maintenance costs of $265,000 at the end of each year during its economic life of five years. At the end of the five years, the new machine will have a of $600,000. It will be fully depreciated by the straight-line method. Pilot will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 34 percent and the appropriate is 12 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should Pilot Plus Pens replace the old machine now or at the end of five years?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...