Should you replace the old machine

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Reference no: EM132019595

Suppose you are thinking to replace an old machine with a new one for your business. The old machine cost you $100,000, and the new one costs $150,000.

The new machine will be depreciated on a three-year MACRS basis. The new machine has a 5-year life and a salvage value of zero at the end of this period.

The old machine was purchased 5 years ago, and it is being depreciated at the rate of $9,000 per year. Its book value is $55,000, and its salvage value today is $65,000. You estimate that you will be able to sell the old machine for $10,000 in 5 years, if you decide to not replace it.

The new machine will save you $50,000 per year. The tax rate is 40%, and the required rate of return is 10%. Based on the NPV and IRR investment criteria, should you replace the old machine?

We are given this template:

	Year 1	Year 2	Year 3	Year 4	Year 5
Cost Savings	$ 50,000.00	$ 50,000.00	$ 50,000.00	$ 50,000.00	$ 50,000.00
Depreciation New
Depreciation Old	$ 9,000.00	$ 9,000.00	$ 9,000.00	$ 9,000.00	$ 9,000.00
Increm.
EBIT
Taxes
NI


Year	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
OCF
NCS
Change in NWC
CFFA

NPV
IRR

Reference no: EM132019595

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