Answered step by step
Verified Expert Solution
Question
00
1 Approved Answer
Question 5: One year ago, your company purchased a machine used in manufacturing for $100,000. You have learned that a new machine is available that
Question 5: One year ago, your company purchased a machine used in manufacturing for $100,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $120,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value. You expect that the new machine will produce EBITDA (earnings before interest, taxes, depreciation, and amortization) of $40,000 per year for the next 10 years. The current machine is expected to produce EBITDA of $15,000 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. All other expenses of the two machines are identical. The market value today of the current machine is $40,000. Your company's tax rate is 35%, and the opportunity cost of capital for this type of equipment is 8%. Is it profitable to replace the year-old machine? (8 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started