Question
One year ago, your company purchased a machine used in manufacturing for $ 115 comma 000. You have learned that a new machine is available
One year ago, your company purchased a machine used in manufacturing for $ 115 comma 000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $ 160 comma 000 today. The CCA rate applicable to both machines is 30 %; neither machine will have any long-term salvage value. You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of $ 35 comma 000 per year for the next ten years. The current machine is expected to produce EBITDA of $ 21 comma 000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $ 50 comma 000. Your company's tax rate is 38 %, 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