Question
One year ago, your company purchased a machine used in manufacturing for $100,000 . You have learned that a new machine is available that offers
One year ago, your company purchased a machine used in manufacturing for $100,000 . You have learned that a new machine is available that offers many advantages and that you can purchase it for $190,000 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 $60,000 per year for the next eight years. The current machine is expected to produce EBITDA of $30,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $60,000. Your company's tax rate is 25%, and the opportunity cost of capital for this type of equipment is 10%. 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