Reference no: EM132554958
One year ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages and you can purchased it for $130,000 today. It will be depreciated on a straight line basis over 10 years and has no salvage value.
You expect that the new machine will produce a gross margin (revenue minus operating expense other than depreciation) of $40,000 per year for the next ten years. The current machine is expected to produce a gross margin of $20,000 per year. The current machine is being depreciated on a straight line basis over a useful life of 11 years, and has no salvage value, so depreciated expense for the current machine is $9,000 per year.
The market value today for the current machine is $50,000. Your company's tax rate is 45%, and the discount rate is 10%.
1) What is the after tax salvage value if selling the current machine today? (hint: first find out what is the total depreciation of the current machine and what is the book value of the current machine)
2) What is the incremental depreciation if your company purchasing the new machine and at the same time selling the old machine? (hint: First find out what is the new depreciation per year for the new machine? And what is the depreciation of the current machine? The incremental depreciation is the difference between new depreciation and old depreciation)
3) What is the cash flow for year 0 if your company decide to sell the current machine and purchase the new machine today? (hint: thinking about what are possible cash flows for year 0)
4) What is the NPV if your company decide to purchase the new machine? (hint: to find NPV you need to know the cash flow for year 0 and cash flow for year 1-10, and discount rate. What is the incremental cash flow for the year 1 to 10 if your company decide to sell the current machine and purchase the new machine today? the formula you can use to find the cash flow from year 1 to 10 is {(sales-cost)*(1-tax rate)+Depreciation *tax rate}.