Question
Ford is considering the purchase of a new machine to replace the existing one to increase the productivity of the company in order to save
Ford is considering the purchase of a new machine to replace the existing one to increase the productivity of the company in order to save the company from possible bankruptcy. The existing machine has a book value of $3,000 and can be sold for $4,000 in the market.The old machine is being depreciated on a straight-line basis, and its estimated salvage value 3 years from now is zero.The new machine will reduce costs (before taxes) by $7,000 per year.The new machine has a 3-year life, its price is $12,000 with an additional installation cost of $2,000, and it can be sold for an expected $2,500 at the end of the third year.The new machine would be depreciated over its 3-year life using the MACRS method. The new machine will require an increase in net operating working capital of $3,750.Ford's marginal tax rate is 40 percent. Because this project is expected to be riskier than average projects, the company uses a risk-adjusted weight average cost of capital of 13.75 percent to evaluate the project. Please advise Ford to take or to reject this replacement project.You must show all your work
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