Question
H&M Textile Company purchased a machine for $480,000 five years ago. The company recently decided to replace this machine by a new model machine, which
H&M Textile Company purchased a machine for $480,000 five years ago. The company recently decided to replace this machine by a new model machine, which can be bought for $560,000 today. The new machine is expected to depreciate on a straight-line basis over seven years and has no salvage value. The new machine will produce earnings before interest, tax, depreciation and amortization (EBITDA) of $100,000 per year for the next seven years. The current machine is expected to produce an EBITDA of $50,000 per year for the remaining seven years. The current machine is being depreciated on a straight-line basis over useful life of 12 years and has no salvage value. The companys tax rate is 30% and the cost of capital for this type of equipment is 10%.
Required?
- Calculate the net free cash flow of the project? (4 pts)
- Discuss whether the firm should replace the old machine by the new machine
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