Question

One year ago, your company purchased a machine used in manufacturing for S110,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for S170,000 today. The CCA rate applicable to both machines is 30%; 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 $60,000 per year for the next ten years. The current machine is expected to produce EBITDA of $20,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is S50.000. Your company's tax rate is 38%, and the opportunity cost of capital for this type of equipment is 12%. Should your company replace its year-old machine? What is the NPV of replacement? The NPV of replacement is Sound to the nearest dollar.)

Answer 1

Price of machine 1 year ago = $110,000

Price of new machine now = $170,000

CCA rate = 30%

New machine EBITDA = $60,000 for 10 years

Current machine EBITDA = $20,000

Proceeds from sale of current machine = $50,000

tax rate = 38%

opportunity cost of equipment = 12%

NPV of replacement:

= $50,000-$170,000 + $60,000/(1.12) + $60,000/(1.12)^2 + $60,000/(1.12)^3 + $60,000/(1.12)^4 + $60,000/(1.12)^5 + $60,000/(1.12)^6 + $60,000/(1.12)^7 + $60,000/(1.12)^8 + $60,000/(1.12)^9 + $60,000/(1.12)^10

NPV = $219,013