tal Budgeting

Part $1$ of $2$

Points: $0$ of $1$

One year ago, your company purchased a machine used in manufacturing for $$105,000.$ You have learned that a new machine is available that offers many advantages and you can purchase it for $$160,000$ 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 $$35,000$ per year for the next $10$ years. The current machine is expected to produce a gross margin of $$24,000$ per year. The current machine is being depreciated on a straight$-$line basis over a useful ife of $11$ years, and has no salvage value, so depreciation expense for the current machine is $$9,545$ per year. The market value today of the current machine is $$45,000.$ Your companys tax rate is $40\%,$ and the opportunity cost of capital for this type of equipment is $11\%.$ Should your company replace its year$-$old machine?