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What is the NPV of replacement

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Question - One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $170,000 today.

The CCA rate applicable to both machines is 20%; neither machine will have any long-term salvage value.

You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of $40,000 per year for the next 10 years.

The current machine is expected to produce EBITDA of $23,000 per year.

All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your company's tax rate is 40%, and the opportunity cost of capital for this type of equipment is 10%.

Required -

1) What is the NPV of replacement?

2) Should your company replace its year-old machine?

Reference no: EM132858853

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