Question
The Yonan Equipment Company purchased a machine 5 years ago at a cost of $100,000. The machine had an expected life of 8 years at
The Yonan Equipment Company purchased a machine 5 years ago at a cost of $100,000. The machine had an expected life of 8 years at the time of purchase and an expected market value of $10,000 at the end of the eighth year. It can be sold today for $26,000 and is being depreciated using the MACRS 5-year class life. A new machine can be purchased for $100,000, including installation costs. During its three year life, it will reduce cash operating expenses by $50,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. The new machine is so efficient that inventories are expected to decrease by $2,000 while accounts payable will decrease by $1,000. This machine falls into the MACRS 3-year class life. The firms tax rate is 40% and the appropriate discount rate is 16%. Should Yonan replace the old machine? (find NPV)
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