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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

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 and you can purchase it for

$155,000

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

$40,000

per year for the next 10 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

$65,000.

Your company's tax rate is

38%,

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

10%.

Should your company replace its year-old machine?

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