Reference no: EM133123482

Question - ABC is wondering whether it should replace its old machine. The machine's current salvage value is $2.8 million. Its current book value is $1.6 million. . If not sold, the old machine will require maintenance costs of $855000 at the end of the year for the next five years. Depreciations on the old machine is $320000 per year. At the end of five years, it will have a salvage value of $140000 and a book value of 0. A replacement machine costs $4.5 million now and requires maintenance costs of $350000 at the end of each year during its economic life of five years. At the end of the five years, the new machine will have a salvage value of $90000. It will be fully depreciated by the straight-line method. In five years a replacement machine will cost $4500000. The company will need to purchase this machine regardless of what choice it makes today. The corporate tax rate is 40% and the appropriate discount rate is 8%. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should the company replace the old machine now or at the end of five years? Use excel to calculate the NPV for both options and show detailed work.