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; you can purchase it for

$145 000

today. It will be depreciated on a straight-line basis over ten years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of

$35 000

per year for the next ten years. The current machine is expected to produce a gross margin of

$22 000

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 tax rate is

40%,

and the opportunity cost of capital for this type of equipment is

12%.

Should your company replace its year-old machine?

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Part 1

The NPV of replacing the year-old machine i