Question
One year ago, your company purchased a machine used in manufacturing for $ 90 comma 000. You have learned that a new machine is available
One year ago, your company purchased a machine used in manufacturing for $ 90 comma 000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $ 170 comma 000 today. The CCA rate applicable to both machines is 40 %; 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 $ 45 comma 000 per year for the next 10 years. The current machine is expected to produce EBITDA of $ 22 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 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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