Reference no: EM132023714

Komatsu Cutting Technologies is considering replacing one of its CNC machines with one that is newer and more efficient. The firm purchased the CNC machine 12 years ago at a cost of $130,000. The machine had an expected economic life of 15 years at the time of purchase and an expected salvage value of $12,000 at the end of the 15 years. The original salvage estimate is still good, and the machine has a remaining useful life of 3 years. The firm can sell this old machine now to another firm in the industry for $30,000. The new machine can be purchased for $162,000, including installation costs. It has an estimated useful (economic) life of 8 years. The new machine is expected to reduce cash operating expenses by $32,000 per year over its 8 year life, at the end of which the machine is estimated to be worth only $3,000. The firm's marginal tax rate is 33%, and its after-tax MARR is 13%. The new machine is classified as a seven-years MACRS and the old machine is already fully depreciated. If the firm needs the service of these machines for an indefinite period and no technology improvement is expected in future machines, should Komatsu Cutting purchase the new machine now or keep the old machine? Enter the ANNUAL EQUIVALENT COST of the preferred alternative as a positive number. Include the reduced operating expenses of the new machine as revenue in your analysis of the cash flow for the new machine.