Question

REPLACEMENT ANALYSIS The Oviedo Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has a book value and a market value of zero. However, the machine is in good working order and will last at least another 10 years. The proposed replacement machine will perform the operation so much more efficiently that Oviedo's engineers estimate that it will produce after-tax cash flows (labor savings and depreciation) of $6,000 per year. The new machine will cost $40,000 delivered and installed, and its economic life is estimated to be 10 years. It has zero salvage value. The firm's WACC is 10%, and its marginal tax rate is 35%. Should Oviedo buy the new machine? Ovied -Select- purchase the new machine. should should not

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Σ AutoSum : A Insert Delete Format Fill 2 Clear Sort & Filter Editing Find & Select Cells PL PJ P K PL 5 Calibri 11 AA = = = pt Wrap Text General E Copy Paste B I U B- SF A Merge Format Painter Merge & Center - Center $ -% % 4:0 .00 . Conditional Format Cell Formatting as Table Styles Clipboard Font Alignment Number Styles PF732 PA PB PC PD PE PE PG PH 731 732 OVIEDO 733 OCF 6000 734 INVESTMENT 40000 735 736 NPV = PV OF ALL OCFS - INITIAL INVESTMENT 737 NPV = (6000 X PVIFA @10%, 10 YEARS) - 40000 738 NPV = (6000 X 6.14456711) - 40000 739 NPV = -3132.60 740 741 AS NPV IS NEGATIVE, WE SHOULD NOT PURCHASE 742 743 744 745 746 NOTE ON FORMULA 747 PVIFA @10%, 10 YEARS 6.14456711 (1/r)*(1-(1/(1+r)^n)) 748 749 NON IRRnpvbeta RATION PBP ARR invest, EAA MI-np-ir_ REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED Rea ferences: DX15 REPLACEMENT STIL O BOND OPTION TO WAIT BOU 130% 0 1 à e v s E - 5 W K. DE 10 ENG