# One year​ ago, your company purchased a machine used in manufacturing for \$115,000. 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 \$45,000 per year for the next ten years. The current machine is expected to produce EBITDA of \$22,000 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 \$10,455 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 tax rate is 35%​, and the opportunity cost of capital for this type of equipment is 11%. Is it profitable to replace the​ year-old machine?What is the NPV of the replacement is \$______ (Round to the nearest​ dollar.)

Question
754 views

One year​ ago, your company purchased a machine used in manufacturing for \$115,000. 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 \$45,000 per year for the next ten years. The current machine is expected to produce EBITDA of \$22,000 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 \$10,455 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 tax rate is 35%​, and the opportunity cost of capital for this type of equipment is 11%. Is it profitable to replace the​ year-old machine?

What is the NPV of the replacement is \$______ (Round to the nearest​ dollar.)

check_circle

Step 1

Calculation of NPV of Replacement:

To calculate the NPV of Replacement, follow the below steps:

Step 2

Calculation of Taxes from Sale of Old Machine for Year 0:

Step 3

Calculation of Cash Flow or Initial Investment for Year...

### Want to see the full answer?

See Solution

#### Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in