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A company is considering the replacement of an old machine with a new machine. The old machine was purchased 5years ago for $1 million. Additional
A company is considering the replacement of an old machine with a new machine. The old machine was purchased 5years ago for $1 million. Additional information relating to these machines (cash flows are innominalterms) is as follows:
items | old machine ($) | new machine($) |
current market value | 350,000 | 560,000 |
remaining life | 5 years | 5 years |
residual value in 6 years time | 0 | 10,000 |
cash operating receipts | 40,000 in excess of old machine |
The real required rate of return is 7per cent per annum, and the anticipated inflation rate is 3 per cent per annum. Using the nominal values, calculate the net present value of replacing the old machine with the new machine. Should the company go ahead with the replacement decision?
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