Reference no: EM133264854
Case: Last year Avenger Solutions purchased and installed a new Thanos Super-Smasher used in compacting cars, SUVs, and small trucks into 2 cubic yards of compacted metal. The Thanos cost $688,000 and had a "useful life" of 6 years. Recently the firm's CEO, Dr. Stephen Strange, became aware of a new technology that promised many advantages over the Thanos, including compacting the junk vehicles into 1 cubic yard of compacted metal, instead of 2 cubic yards. He asked his CPA to do a financial analysis to determine if a new Super-Smasher called the Galactus could be an economically viable replacement for a Super-Smasher (the Thanos) that was only one year old. The CPA determined that the new technology could be purchased for $900,000 today and would have a useful life of 5 years before it woulg likely become technologically obsolete and be essentially worthless. (The Galactus runs hotter than the Thanos and has a shorter useful life). For depreciation purposes the company uses the straight line method.
Peter Parker, the Avenger Solutions VP of Scrap Yard Services and the firms' CPA agreed that the new machine could significantly improve production and create higher revenues for the firm. With this information the CPA estimated that the new technology will produce EBITDA (earnings before interest, taxes, depreciation and amortization) of $509,000 per year for the next 5 years. The current machine is expected to produce EBITDA of $395,000 per year. The current machine is being depreciated on a straight line basis over a useful life of 6 years after which it will have a $28,000 salvage value. All other expenses of the two machines are identical. The market value of the current machine is $525,000. Avengers Solutions tax rate is 21% and the cost of capital is 12%.
Question: 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 the Thanos Super Smasher
HINT: The Salvage Value of the Thanos (the current machine) needs to be considered to correctly complete this problem. The Galactus does not have a Salvage Value.