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Find cost of capital in firm

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Reference no: EM133067788

The company is considering replacing a machine. The old one is currently being depreciated at $80,000 per year (straight-line), and is scheduled to end in five years with no remaining book value. If you don't replace it, you will be lucky to get it removed for the amount you could salvage it for, so you don't expect any profit in five years.

If you replace it now, you believe you can salvage it for $425,000 (net) and buy a new machine for $850,000, plus $25,000 shipping fee and another $15,000 for installation. The machine will reduce the operating costs of the company by $145,000 per year. The new machine will be depreciated using the three-year MACRS (for simplicity purposes - the table is provided in Moodle). The useful life of this machine is five years, and is expected to yield $15,000 in net salvage value at the end of the five years. You may assume a tax rate of 35%.

Cost of Capital is 10%. Cannot use excel.

Using the cost of capital in your firm, should you invest in the new machine? Why?

Reference no: EM133067788

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