Question
Question 1A A company intends to upgrade its machine for a 10-year project, which just passed its sixth year. The new machine is of higher
Question 1A
A company intends to upgrade its machine for a 10-year project, which just passed its sixth year. The new machine is of higher precision which is estimated to reduce defect costs of $80,000 per year and warranty claims by customers by $100,000 per year for the remaining life of the project. The applicable corporate tax rate is 17% and the cost of capital for similar risk projects is 15 percent. More details on the existing and new machines are available:
|
| Existing Machine | New Machine |
| Depreciable sum | $1,000,000 | $700,000 |
| Depreciation method | Straight line | Straight line |
| Current salvage value | $500,000 | -- |
| Salvage value in 4 years time | $ 0 | $ 100,000 |
| Maintenance fee | $ 0 | Year 2: $40,000 |
Required:
- Compute the incremental net present value of for the new machine.
- Should the new machine be purchased?
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Financial Trading And Investing
Authors: John Teall
3rd Edition
0323909558, 978-0323909556
