Finance

Martin is the production manager of KegoToys, and currently he is looking for a computer numerical control (CNC) machine to replace the old milling machine. The old machine was purchased three years ago at a total cost of $6,000,000. It has an eight-year economic life with five years remaining and zero salvage value. If the old machine were to be sold today, it would be worth $3,750,000. The company uses the straight line depreciation method on all production machines. The firm's cost of capital is 15 with a marginal tax rate of 30 The new CNC machine is proposed by Industrial Insight Ltd., a well known consulting firm in toy manufacturing. The purchase price of the proposed machine would be $7,200,000. In addition, the company would incur $400,000 shipping and installation costs and $300,000 investment in net working capital. The economic life of the new machine is five years with zero scrap value. It is expected that the new machine can reduce before-tax operating expenses by $1,500,000 every year. The company had paid $100,000 to Industrial Insight to obtain the assessment report on this replacement recommendation