Reference no: EM133174581

Question - A company currently uses a machine that was purchased two years ago for $40,000. It is being depreciated on a straight-line basis and has 6 years of remaining life. It can either be sold now for $15,000, or for $5,000 at the end of its useful life.

The company has just received an offer for a technologically advanced replacement machine that costs $ 80 000, has a useful life of 6 years, and an estimated salvage value of $ 8 000. It would fall under an accelerated depreciation schedule, with applicable rates of 20%, 32%, 19%, 12%, 11%, and 6%, respectively. Due to the higher efficiency of the replacement machine, annual sales would increase by $9,000, with operating expenses reduced by $12,000. Inventories would increase by $8,000, while accounts receivable would increase by $2,000 and accounts payable by $1,000.

Required -

1. Should the company make the replacement if its marginal tax rate is 30% and its cost of capital is 12%?

2. Would your conclusions be different if the current machine had initially been purchased for $80,000, all other assumptions remaining unchanged? Why?