Question
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
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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started