Reference no: EM132933082

One year ago, your company purchased a machine used in manufacturing for $110,000. You have since learned that a new machine is available that offers many advantages, and you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You also expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $40,000 per year for th: next 10 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. The market value today of the current machine is $50,000. Your company's tax rate is 45%, and the opportunity cost of capital for this type of equipment is 10%. To evaluate the merits of this switch, you have also just paid $25,000 to a consultant for an independent report.

Question 1: What would be the incremental net cash flows at t0 (i.e., today)?

Question 2: What would be next year's incremental operating cash flows (OCF)?

Question 3: Would this decision create value? Please discuss in one or two sentences.

Question 4: Should we include the consultant fee in our analysis? Please discuss why or why not