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 many advantages;
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; you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over ten years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $40,000per year for the next ten years. The current machine is expected to produce EBITDA of $21,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine $9,091 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000.Your company's tax rate is 35%,and the opportunity cost of capital for this type of equipment is 10%.
Is it profitable to replace the year-old machine?
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