Reference no: EM132653324
Last year Spacely Space Sprockets purchased and installed a new ELE 1800 Acoustic Assembler, used in making sprockets for the private space travel industry. The ELE 1800 cost $1,250,000 and had a "useful life" of 10 years with no salvage value. Recently the firm's CEO, Mr. Spacely, became aware of a new technology that promised many advantages over the ELE 1800 including a coating technology that improved the durability of sprockets during extended periods in space travel. Mr. Spacely believed that the improvement would provide his firm a competitive advantage generating more demand for the Spacely sprocket. He asked his CPA, George Jetson, to do a financial analysis to determine if a new technology, a machine called the ADV 2000, could be an economically viable replacement for the ELE 1800 Acoustic Assembler that was only one year old. The CPA determined that the new technology could be purchased for $1,548,000 today and would have a useful life of 9 years before it would likely become technologically obsolete and be essentially worthless. For depreciation purposes the company uses the straight line method.
Both Mr. Spacely and George Jetson agreed that the new machine could create higher revenues for the firm without increasing operating expenses other than depreciation. With this information the CPA estimated that the new technology (the ADV 2000) will produce EBITDA of $485,000 per year for the next 9 years.
Question 1: The current machine is expected to produce EBITDA of $365,000 per year. The current machine is being depreciated on a straight line basis with one year of depreciation already expensed on the income statement. The market value of the current machine is $950,000. The company's tax rate is 21% and the cost of capital is 12%. Calculate the NPV of the replacement decision and choose the best answer below. NOTE: DO NOT make any assumptions regarding the tax treatment for the gain or loss on the disposal of the current ELE 1800 machine.
Group of answer choices
[A] NPV = $-55,469 DO NOT BUY the ADV 2000
[B] NPV = $-40,292 DO NOT BUY the ADV 2000
[C] NPV = $-85,859 DO NOT BUY the ADV 2000
[D] NPV = $557,708 BUY the ADV 2000
[E] NPV = $-598,000 DO NOT BUY the ADV 2000