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Clipboard N Font Alignme and has no salvage value, so depreciation expe D Problem 9-17 One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $150,000 today. It will be depreciated on a straightline basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses her than depreciation) of $40,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $20,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is $10,000 per year. The |market value today of the current machine is $50,000. Your company's taxd rate is 25%, and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its year-old machine? AutoSave OH CH09_SM_5e Student - Compatibility Mode File Home Insert Draw Page Layout Formulas Data Review View Developer X Cut Arial 10 VAA = = = a Wrap Text I Copy Paste BIU CA EEEE Merge & Center * Format Painter clipboard T Font Alignment H20 f A B D E G 5 6 7 B 9 10 11 New machine cost (year 0) Current machine purchase price Current machine depreciation Current machine book value Current machine market value New machine depreciation Old EBITDA New EBITDA Tax rate Cost of capital Life of machines ($150,000) $110,000 $10,000 per year $100,000 $50,000 $15,000 per year $20,000 per year $40,000 per year 25% 10% 10 years 12 13 14 15 16 17 18 19 20 Capital gain from old machine sale Year O incremental free cash flow Incremental EBITDA Incremental depreciation Annual benefit of replacement 21 22 23 24 Net Present Value of replacement 25 26 27 31 33 34 35 36 9-12 9-13 9-14 9-17 9-18 9-27 9-28 9-299-30 9-31 9-32 to Type here to search