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The company is evaluating if the replacement of an old machine is economically feasible. You have the following information: New machine: Purchase price is $5
The company is evaluating if the replacement of an old machine is economically feasible. You have the following information: New machine: Purchase price is $5 million Economic life 5 years Annual EBITDA is $2.4 million Book value in 5 years is 0, while market value is 0.8 million Old machine: Book value today is $2 million while market value is $1.4 million Remaining economic life is 5 years Annual EBITDA is $1.5 million Book value and market value in 5 years is 0. Company tax rate is 25% on both profits and capital gains. The cost of capital for the company is 10%. Questions: Your task is to find the incremental cash-flows from replacement decision and evaluate if replacement is economically feasible based on NPV. (Hint: you only estimate one NPV!)
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