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A new NC machine is being considered as a replacement for a current machine. The current machine was purchased 12 years ago for $45,000, with
A new NC machine is being considered as a replacement for a current machine. The current machine was purchased 12 years ago for $45,000, with an estimated life of 20 years with no salvage. Current market value is thought to be $40,000. Last year, this machine produced revenues of $25,425 while incurring cash operating expenses of $7,429. Inflation has been averaging 7% per year and revenues have been fully responsive while costs have been increasing 23% per year (primarily maintenance). Market value of the machine is expected to decline by 14% per year. The new machine will cost $53,500. Life and salvage are unknown. Revenues will be the same as the current machine, and cash operating costs will be $5,000 the first year and increase by 11% per year. For the current machine, DDB switching to SYD after 2 years has been used. Five year MACRS will be used for the new machine. The tax rate is 50% on ordinary income, and 20% on capital gains. a. Use IRR techniques to find how long the current machine should be kept. b. Calculate the rate of return on the incremental (B-A) investment. Assume the new machine will last for the length of time calculated in part a, and that salvage for the current machine will be 0. A new NC machine is being considered as a replacement for a current machine. The current machine was purchased 12 years ago for $45,000, with an estimated life of 20 years with no salvage. Current market value is thought to be $40,000. Last year, this machine produced revenues of $25,425 while incurring cash operating expenses of $7,429. Inflation has been averaging 7% per year and revenues have been fully responsive while costs have been increasing 23% per year (primarily maintenance). Market value of the machine is expected to decline by 14% per year. The new machine will cost $53,500. Life and salvage are unknown. Revenues will be the same as the current machine, and cash operating costs will be $5,000 the first year and increase by 11% per year. For the current machine, DDB switching to SYD after 2 years has been used. Five year MACRS will be used for the new machine. The tax rate is 50% on ordinary income, and 20% on capital gains. a. Use IRR techniques to find how long the current machine should be kept. b. Calculate the rate of return on the incremental (B-A) investment. Assume the new machine will last for the length of time calculated in part a, and that salvage for the current machine will be 0
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