Brown Company is considering the purchase of a new machine to replace an existing one. The old machine was purchased 3 years ago at a cost of $3,000, and it is being depreciated on a straight-line basis to a zero salvage value over a 6-year life. The current market value of the old machine is $2,000. The new machine, which falls into the MACRS 3-year class, has an estimated life of 3 years, it costs $5,000, and Brown plans to sell the machine at the end of the fifth year for $200. The applicable depreciation rates are 0.33, 0.45, 0.15, and 0.07. The new machine is expected to generate before-tax cash savings of $500 per year. The company's tax rate is 40 percent. if the firm’s cost of capital is 14 percent, what is the NPV of the proposed project?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Brown Company is considering the purchase of a new machine to replace an existing one. The old machine was purchased 3 years ago at a cost of $3,000, and it is being
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