Reference no: EM132856726

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 $170,000 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 $50,000 per year for the next ten years. The current machine is expected to produce EBITDA of $20,000 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.

Problem 1: Your? company's tax rate is 40%?, and the opportunity cost of capital for this type of equipment is 11%. Is it profitable to replace the? year-old machine?