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3. (20%) You are trying to decide whether to replace a machine on your production line. The new machine will cost $1 million, but will
3. (20%) You are trying to decide whether to replace a machine on your production line. The new machine will cost $1 million, but will be more efficient than the old machine, reducing costs by $0.5 million per year. Your old machine is fully depreciated, but you could sell it for $100,000. You would depreciate the new machine over a 5-year life using MACRS. The new machine will not change your working capital needs. Your tax rate is 30%, and your cost of capital is 10%. (a) What is the capital gain on salvage? (b) What is the cash flow from salvage value? (c) What is the NPV for replacing the machine? Should you replace the machine? MACRS Depreciation Rate (For 5-year Life) Year Depreciation Rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%
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