Firm required rate of return

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The GH Company is considering the purchase of a new machine tool to replace an obsolete one. The machine being used for the operation has both a tax book value and a market value of zero; it is in good working order, however, and will last physically for at least another 10 years. The proposed replacement machine will perform the operation so much more efficiently that GHC engineers estimate it will produce after-tax cash flows (labour savings and depreciation) of Tshs 90 million per year. The new machine will cost Tshs 400 million delivered and installed, and its economic life is estimated to be 10 years. It has zero salvage value. The firm's required rate of return is 10 percent, and its tax rate is 34 percent. Should GHC buy the new machine?

Reference no: EM133113993

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