Question
One year ago, your company purchased a machine used in manufacturing for 115000 . You have learned that a new machine is available that offers
One year ago, your company purchased a machine used in manufacturing for 115000 . You have learned that a new machine is available that offers many advantages; you can purchase it for 170000 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 45000 per year for the next ten years. The current machine is expected to produce EBITDA of 25000 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 is 10455 per year. All other expenses of the two machines are identical. The market value today of the current machine is 50000. Your company's tax rate is 20%, and the opportunity cost of capital for this type of equipment is 11%. Is it profitable to replace the year-old machine?find NPV
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