One yearago, your company purchased a machine used in manufacturing for $95,000. You have learned that a
Question:
One yearago, 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 that you can purchase it for $150,000 today. The CCA rate applicable to both machines is 40%; neither machine will have anylong-term salvage value. You expect that the new machine will produce earnings beforeinterest, taxes,depreciation, and amortization(EBITDA) of $55,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $22,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Yourcompany's tax rate is 38%, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace itsyear-old machine?
What is the NPV ofreplacement?
The NPV of replacement is $
48,821
(Round to the nearestdollar.)
Should your company replace itsyear-old machine?
A.
No, because there is a loss from replacing the machine.
B.
Yes, because there is a profit from replacing the machine.
Your answer is correct.
C.
Yes, because a new machine will always be an improvement for the company.
D.
No, because the only time a machine should be replaced is when it stops working completely.
HOW TO GET 48821 for part a