Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1333 Emerson, Inc. is evaluating whether to replace a machine. The current machine was purchased 3 years ago for $6,000 and falls into the MACRS

1333 image text in transcribed
Emerson, Inc. is evaluating whether to replace a machine. The current machine was purchased 3 years ago for $6,000 and falls into the MACRS 3-year class. It has 3 years of remaining life and a $600 salvage value three years from now. The current market value of the older machine is $2,000 Alternatively, the company could purchase a new machine for $11,600. Delivery of the new machine would cost $200 and installation would cost $200. The new machine is expected to increase inventory needs by $800, and accounts payable is expected to increase by $600. The new machine falls in the MACRS 3-year class, has a 3-year economic life and a salvage value at the end of 3 years of $7,000. It is expected to increase revenue by $3,500 per year and is expected to decrease costs by $2,500 per year. The firm has a 40% tax rate and a cost of capital of 12%. The MACRS 3 -year class uses the following percentages: 33%,45%,15%, and 7% (in that order). (Round all CFs to the nearest dollar.) Should the firm replace its older machine with the new machine? A. Yes, the NPV is +$4,428 B. Yes, the NPV is +$4,676. C. Yes, the NPV is +$4,809. D. Yes, the NPV is +$5,023 E. Yes, the NPV is +$5,263

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions