Question
One year? ago, your company purchased a machine used in manufacturing for $ 100 comma 000. You have learned that a new machine is available
One year? ago, your company purchased a machine used in manufacturing for $ 100 comma 000. You have learned that a new machine is available that offers many advantages and you can purchase it for $ 150 comma 000 today. It will be depreciated on a? straight-line basis over 10 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 $ 40 comma 000 per year for the next 10 years. The current machine is expected to produce a gross margin of $ 21 comma 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 $ 9 comma 091 per year. The market value today of the current machine is $ 60 comma 000. Your? company's tax rate is 42 %?, and the opportunity cost of capital for this type of equipment is 11 %. Should your company replace its? year-old machine?
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