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zBelow is the selected information from the company's financial statements. Book Value Market Value Cost of Capital (Million) (Million) Long-Term Debt 200 200 10% Common

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zBelow is the selected information from the company's financial statements. Book Value Market Value Cost of Capital (Million) (Million) Long-Term Debt 200 200 10% Common Stock 400 1000 20% Now the company needs to decide whether to keep or replace the old equipment. The tax rate is 40%. There are two choices and here are their consequences: a) Keep existing equipment - it generates SSM with maintenance costs equal to 60% of sales. Its book value is $3M and it depreciates over 7 years (1/7 each year). b) Buy new equipment - it generates $5.5M in sales with maintenance costs equal to 50% of sales. It requires an immediate investment of $12M. The old machine is sold for $1.8M after an additional one-time depreciation of $1.2M. It also requires a one- time increase in inventory of $500K and a reduction in year 7. What should the company do? A. The two choices are the same B. The company should keep old equipment C. I am not sure D. The company should replace the equipment

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