Question
One yearago, your company purchased a machine used in manufacturing for $105,000 . You have learned that a new machine is available that offers many
One yearago, your company purchased a machine used in manufacturing for $105,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $ 155 000 today. It will be depreciated on astraight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin(revenues minus operating expenses other thandepreciation) of $ 40 000 per year for the next 10 years. The current machine is expected to produce a gross margin of $ 24 000 per year. The current machine is being depreciated on astraight-line basis over a useful life of 11years, and has no salvagevalue, so depreciation expense for the current machine is $ 9 545 per year. The market value today of the current machine is $ 55 000. Yourcompany's tax rate is 38 %and the opportunity cost of capital for this type of equipment is 11 %. What is the NPV of replacing the year-old machine? Should your company replace itsyear-old machine?
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