Question
ABC Corp. is considering replacing one of its existing machines with a new, more automated and efficient one. The old machine has a book value
ABC Corp. is considering replacing one of its existing machines with a new, more automated and efficient one. The old machine has a book value of $100,000. It could be sold today for $50,000. The remaining book value is being strait line depreciated to 0 salvage value, at the rate of $20,000/year. The new machine costs $400,000. If introduced, the company estimates that will save annually $60,000 on a before tax basis. This is considered a yearend cash flow. The corporate tax rate is 40%; discount rate used is 15%. The new machine will be straight line depreciated on ten year life to 0 salvage value. In order to encourage the replacement of the old machine the state Environmental Protection Agency is offering a replacement subsidy. This is paid one year after the replacement. What is the minimum subsidy that will make the replacement worthwhile?
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