Reference no: EM131012761
Task 18 One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $140,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value.
You expect that the new machine will produce EBITDA (earning before interest, taxes, depreciation, and amortization) of $40,000 per year for the next 10 years.
The current machine is expected to produce EBITDA of $25,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $10,909 per year. All other expenses of the two machines are identical.
The market value today of the current machine is $50,000. Your company’s tax rate is 42%, and the opportunity cost of capital for this type of equipment is 12%. Is it profitable to replace the year-old machine?
a. NPV of replacement is $.............. (Round to the nearest dollar.)
b. Should your company replace the old machine?
A. No, there is a loss from replacing the machine.
B. Yes, there is a profit from replacing the machine.
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