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
Asked Apr 4, 2019
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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.)

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Expert Answer

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:

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Step 3

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

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