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3. Smith Metals is considering replacing equipment used to make brackets. The current equipment was purchased four ago for $195,000. At the time of purchase
3. Smith Metals is considering replacing equipment used to make brackets. The current equipment was purchased four ago for $195,000. At the time of purchase it had a 11-year life with an expected salvage value of $25,000. If sold today Smith expects to receive $65,000 for the machine and nothing at end of its life. Smith depreciates all assets using straight-line depreciation. The existing machine generates revenue of $300,000 with a 15% gross profit margin. Revenue is expected to grow at 2% per annum. New machinery today will cost $175,000. The new machinery is expected to last 7 years and have a salvage value of $18,000. The new machinery will lower annual operating costs by $45.000 per annum. In addition the new machine is expected to increase sales to $330.000 growing at 3% per annum. The new machine is expected to have a gross profit margin of 18%. In general customers pay after 83 days and operating costs are paid after 10 days. Assume a tax rate of 25% and a cost of capital of 11%. The project will be financed with an 8% five year loan. Should Smith replace the equipment
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