One year ago, your company purchased a machine used in manufacturing for
$ 105 comma 000$105,000.
You have learned that a new machine is available that offers many advantages; you can purchase it for
$ 160 comma 000$160,000
today. It will be depreciated on a straight-line basis over ten years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of
$ 35 comma 000$35,000
per year for the next ten years. The current machine is expected to produce EBITDA of
$ 25 comma 000$25,000
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 expense for the current machine is
$ 9 comma 545$9,545
per year. All other expenses of the two machines are identical. The market value today of the current machine is
$ 50 comma 000$50,000.
Your company's tax rate is
40 %40%,
and the opportunity cost of capital for this type of equipment is
12 %12%.
Is it profitable to replace the year-old machine?
The NPV of the replacement is
$nothing.
(Round to the nearest dollar.)
Please show me how you got the answer
New Machine Depreciation = 160,000/10 = 16,000
Old Machine Depreciation = 105,000/11 = 9,545
Year 0 | Year 1-10 | |
Gross Margin | 10,000.00 | |
Depreciation | 6,455.00 | |
EBIT | 3,545.00 | |
Tax | 1,418.00 | |
Incremental Earnings | 2,127.00 | |
Add:Depreciation | 6,455.00 | |
Capex | - 160,000.00 | |
68,182.00 | ||
FCF | - 91,818.00 | 8,582.00 |
NPV = -91,818 + (8,582 x 5.6502)
= -43,327.98
No its not profitable to replace the old machine
One year ago, your company purchased a machine used in manufacturing for $ 105 comma 000$105,000....
One year ago, your company purchased a machine used in manufacturing for $ 105 comma 000. You have learned that a new machine is available that offers many advantages; you can purchase it for $ 160 comma 000 today. It will be depreciated on a straight-line basis over ten years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $ 60 comma 000 per year...
One year ago, your company purchased a machine used in manufacturing for $ 95 comma 000. You have learned that a new machine is available that offers many advantages; you can purchase it for $ 160 comma 000 today. It will be depreciated on a straight-line basis over ten years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $ 40 comma 000 per year...
One year ago, your company purchased a machine used in manufacturing for $ 95 comma 000. You have learned that a new machine is available that offers many advantages; you can purchase it for $ 160 comma 000 today. It will be depreciated on a straight-line basis over ten years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $ 35 comma 000 per year...
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One year ago, your company purchased a machine used in manufacturing for $ 105 000. You have learned that a new machine is available that offers many advantages; you can purchase it for $ 155 000 today. It will be depreciated on a straight-line basis over ten years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $ 45 000 per year for the next...
One year ago, your company purchased a machine used in manufacturing for $105,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over ten years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $45,000 per year for the next ten years. The current machine is...
One year ago, your company purchased a machine used in manufacturing for $105,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $40,000 per year for the next 10 years. The current machine...
One year ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages; you can purchase it $150,000 today. It will be depreciated on a straight-line basis over ten years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $45,000 per year for the next ten years. The current machine is expected...
One year ago, your company purchased a machine used in manufacturing for $90,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over ten years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $55,000 per year for the next ten years. The current machine is...