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Should the company purchase the new machine

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Point 1: Adidas is considering replacing its current shoe-making machine, which is installed 5 years ago. The initial installation cost was $20 million. The current market price of this machine is $15 million. The current net cash flow per year, using the current machine, is $0.5 million. The new machine in consideration costs $35 million. Using this machine, the net cash flow per year is expected to be $2.8 million.

Question 1: Both machines have an estimated remaining life of 10 years, at which time the market value of the old machine is $5 million, while the market value of the new machine is $15 million. Assume that the required rate of return is 7.00% p.a., there is no tax, and all relevant cash flows have been considered. Cash flows occur at the end of the year. Should the company purchase the new machine?

Reference no: EM132494641

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