Construct incremental analysis

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Reference no: EM131211606

Suppose you need to decide whether to keep a machine or replace it with a new one:

Old machine: Old machine can operate for 5 years with operating cost of $120,000 per year.

New machine: Replacing old machine with new one requires capital cost of $250,000 in year zero (zero salvage value for old machine). Capital cost is depreciable from year 0 to year 5 (over six years) based on MACRS 5-year life depreciation with the half year convention. New machine can produce with lower operating cost of $45,000 per year for 5 years (from year 1 to year 5).

Assume both machines produce similar good with similar value that yields similar revenue.

Consider income tax of 38% and minimum rate of return 10%. Construct incremental analysis and conclude which alternative is more economically satisfactory? Please show your work.

Reference no: EM131211606

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