Question
one year ago, your company purchased a machine used in manufacturing for $95,000. you have learned that a new machine is available that offers many
one year ago, your company purchased a machine used in manufacturing for $95,000. you have learned that a new machine is available that offers many advantages and you can purchase it for $165,000 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 $50,000 per year for the next 10 years. the current machine is expected to produce a gross margin of $20,000 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 $8,636 per year. the market value today of the current machine is $55,000. your company's tax rate is 40% and the opportunity cost of capital for this type of equipment is 10%. should your company replace it's year old machine?
a) the NPV of replacing the year old machine is?
b)should your company replace it's year old machine?
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