Question
You are considering replacing a machine in your factory. The current machine cost $500,000 seven years ago. It is being depreciated for tax purposes on
You are considering replacing a machine in your factory. The current machine cost $500,000 seven years ago. It is being depreciated for tax purposes on a straight-line basis over its ten year life. The old machine can be sold today for $150,000 or you can sell it in three years for $100,000. The new machine would cost $700,000 and it would fall into the three-year MACRS classification. The MACRS three-year depreciation rates are 33%, 45%, 15%, and 7%. If the new machine is purchased, it would be operated for three years and then sold for $250,000. You are considering the new machine because it would result in labor savings of $150,000 per year. If you purchase the new machine, net working capital requirements will increase by $50,000 because of the need for more spare parts. If your tax rate is 40% and your cost of capital is 10% per year, a. What is the net present value (NPV) of purchasing the new machine? b. Should you move forward: YES or NO?
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