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Should gehr buy the new machine and why

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Reference no: EM132814251

The Gehr 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 book value and a market value of $0; 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 Gehr engineers estimate it will produce after-tax cash flows (cost savings) of $9,000 per year. The new machine will cost $40,000 delivered and installed, and its useful life is estimated to be 10 years. Its expected salvage value is $0.
  • The firm's required rate of return is 10 percent, and its marginal tax rate is 40 percent.

Problem 1: Should Gehr buy the new machine?

Reference no: EM132814251

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