Question
Owl Printing House is considering purchasing a new digital printing press machine to replace the existing printing press machine. The current printing press machine has
Owl Printing House is considering purchasing a new digital printing press machine to replace the existing printing press machine. The current printing press machine has a remaining life of 6 years and a depreciation of $60,000 per year (the depreciation of the current printing machine will last for another 6 years). The after tax market value of the existing printing press machine now is $360,000. The new digital printing press machine cost $600,000 and has an expected life of 6 years. This $600,000 will be 100 percent depreciated straight line over 6 years. The new digital printing press machine is expected to perform more efficiently and produce a before tax cost saving of $70,000 a year. The companys cost of capital is 14 percent and has a tax rate of 32 percent. i) Should the company replace the existing printing press machine? ii) Explain your result in (i).
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