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Torreo Coffee Roaster is considering replacing one of its existing machines with a new one. Torreo bought the old one 4 years ago for $87,500.

Torreo Coffee Roaster is considering replacing one of its existing machines with a new one. Torreo bought the old one 4 years ago for $87,500. It is being depreciated on a SL basis over a 14-year life. The machine could be sold today 1/1/2000, for $20,000.

The new machine costs $95,000. It has a 10-year depreciable life with salvage value of $13,000 in real terms. However, based on the tax law, the asset will be depreciated to 0 over 10 years using a SL method.

In 1999 Torreo's current coffee machine accounted for annual revenue of $50,000 and has annual costs of $25,000. The new machine will increase revenue to $65,000 per year (in real terms, that is, in 1999 dollars). The machine will also increase operating costs by $3,000 in real terms.

The nominal discount rate is 14% per annum. The corporate tax rate is 40%. The annual anticipated inflation rate is 5%. All cash flows occur at the end of year. Taxes are also paid at the end of year. Should Torreo replace the old machine with the new one?

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Torreo coffee roaster's machine replacement Nominal discount rate Inflation Rate Real discount rate Corporate tax 14% 5% 9.00%

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