Solve this whole question.
Problem 9-17 One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $150,000 today. It will be depreciated on a straight-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 than depreciation) of $40,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $20,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is $10,000 per year. The market value today of the current machine is $50,000. Your company's tax rate is 45%, and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its year-old machine? Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. $ $ 110,000 150,000 10 Price of machine (1) Price of machine (2) Machine life (1) Machine life (2) Salvage value (1) & (2) Gross margin (1) Gross margin (2) Depreciation expense (1) Market value (1) Tax rate Opportunity cost 20,000 40,000 10,000 50,000 45% 10% For old machine Book value today Capital loss after sale Tax savings Proceeds from sale including tax savings For new machine EBITDA increase Depreciation expense Depreciation increase FCF increase (annual benefit of replacement) FCF in year 0 NPV of replacement Take opportunity (Yes/No) a year for 10 years Problem 9-17 One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $150,000 today. It will be depreciated on a straight-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 than depreciation) of $40,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $20,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is $10,000 per year. The market value today of the current machine is $50,000. Your company's tax rate is 45%, and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its year-old machine? Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. $ $ 110,000 150,000 10 Price of machine (1) Price of machine (2) Machine life (1) Machine life (2) Salvage value (1) & (2) Gross margin (1) Gross margin (2) Depreciation expense (1) Market value (1) Tax rate Opportunity cost 20,000 40,000 10,000 50,000 45% 10% For old machine Book value today Capital loss after sale Tax savings Proceeds from sale including tax savings For new machine EBITDA increase Depreciation expense Depreciation increase FCF increase (annual benefit of replacement) FCF in year 0 NPV of replacement Take opportunity (Yes/No) a year for 10 years
