One year ago, your company purchased a machine in
Question # 00466360
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Updated on: 01/19/2017 05:42 AM Due on: 01/19/2017

One year ago, your company purchased a machine in manufacturing for $110,000. You have learnedthat a new machine is available that offers many advantages; you can purchase it for $150,000 today. Itwill be depreciated on a straight-line basis over 10 years, after which it has no salvage value. Youexpect that the new machine will produce additional EBITDA (Earnings before interest, taxes,depreciation and amortization) of $40,000 per year for the next 10 years. The current machine isexpected to produce additional EBITDA of $20,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expenses for the current machine is $10,000 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 taxrate is 45%, and the opportunity cost of capital for this type of equipment is 10%. Is it profitable to replace the year-old machine?

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Rating:
5/
Solution: One year ago, your company purchased a machine in