Reference no: EM133111924
Question - One year? ago, your company purchased a machine used in manufacturing for $95,000. You have learned that a new machine is available that offers many? advantages; you can purchase it for $150,000 today. It will be depreciated on a? straight-line basis over ten? years, after which it has no salvage value. You expect that the new machine will contribute EBITDA? (earnings before?interest, taxes,? depreciation, and? amortization) of $55,000 per year for the next ten years. The current machine is expected to produce EBITDA of$22,000 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$8,636 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 20%?, and the opportunity cost of capital for this type of equipment is 10%. Is it profitable to replace the? year-old machine?
The NPV of the replacement is?
Should your company replace its? year-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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