Adequate information:
Market value = $2,800,000
Book value = $1,600,000
Maintenance cost (Saving) of current machine = $855,000
Economic life of current machine = 5 years
Pre-tax salvage value of current machine = $140,000
Initial cost of new machine = $4,500,000
Economic life of new machine = 5 years
Pre-tax salvage value of new machine = $900,000
Maintenance cost (Saving) of new machine = $350,000
Depreciation of new machine = $900,000
Tax rate = 21% or 0.21
Appropriate discount rate, r = 8% or 0.08
To compute: Whether the new machine should be bought by the company.
Introduction:
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