Question
Nikky Co. is considering replacing an old machine with a new one. The old one was purchased 3 years ago for $200,000. It is depreciated
Nikky Co. is considering replacing an old machine with a new one. The old one was purchased 3 years ago for $200,000. It is depreciated straight-line to zero over its 10-year life. It is expected to be worth of 85,000 three years later. If Nikky sells it today, Nikky should receive $150,000 for the old machine. The new machine costs $300,000. It has a life of 5 years and will be depreciated straight-line to zero over its 5-year life. It is expected to be worth $110,000 at the end of 3 years. The new machine is expected to reduce the operating costs by $100,000 in the first year. The cost savings will increase by 5% each year. There is no change in net working capital. The discount rate of this replacement project is 15%, and the tax rate is 35%. Should the company replace the old machine?
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