Question
12-4 REPLACEMENT ANALYSIS The Oviedo Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the
12-4 REPLACEMENT ANALYSIS The Oviedo Company is considering the purchase of a new
machine to replace an obsolete one. The machine being used for the operation has a book
value and a market value of zero. However, the machine is in good working order and will
last at least another 10 years. The proposed replacement machine will perform the operation
so much more efficiently that Oviedos engineers estimate that it will produce after-tax
cash flows (labor savings and depreciation) of $8,000 per year. The new machine will cost $45,000 delivered and installed, and its economic life is estimated to be 10 years. It has zero
salvage value. The firms WACC is 10%, and its marginal tax rate is 35%. Should Oviedo
buy the new machine?
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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
