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One year ago, your company purchased a machine used in manufacturing for $115,000. You have...

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Question

Finance

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 and that you can purchase it for

$170,000

today. The CCA rate applicable to both machines is

40%;

neither machine will have any long-term salvage value. You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of

$50,000

per year for the next 10 years. The current machine is expected to produce EBITDA of

$25,000

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

40%,

and the opportunity cost of capital for this type of equipment is

12%.

Should your company replace its year-old machine?

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