Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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 $ 150,000 today. It will be depreciated on a straight-line basis over ten years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $ 45,000 per year for the next ten years. The current machine is expected to produce EBITDA of $ 22,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $ 10,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $ 50,000. Your company's tax rate is 38 %, and the opportunity cost of capital for this type of equipment is 12 %. Is it profitable to replace the year-old machine?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions