Question
A year ago, Rocky's Coffee Roasting purchased 4 coffee roasters for R3,3 million. Now, in 2021, the company finds that new roasters are available that
A year ago, Rocky's Coffee Roasting purchased 4 coffee roasters for R3,3 million. Now, in 2021, the company finds that new roasters are available that offer significant advantages. The new roasters can be purchased for R5 million and have no salvage value. Both, the old and new roasters', expected useful life ends in 2030. Management forecast that the new roasters will produce a gross profit of R1,5 million a year, so that, using straight-line depreciation, the annual taxable income will be R1 000 000.
The current roasters are expected to produce a gross profit of R800 000 per year, and assuming an useful life of 11 years and straight-line depreciation, a profit before tax of R500 000.
The current market value of the old roasters is R1,5 million. The company's tax rate is 28% and its WACC is 11%.
Ignoring possible taxes on the sale of used equipment and assuming zero salvage values at the end of the roasters' useful lives, should Rocky's Coffee Roasting replace its roasters?
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