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One year ago, your company purchased a machine used in manufacturing for $90,000. You have...

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Question

Finance

One year ago, your company purchased a machine used in manufacturing for

$90,000.

You have learned that a new machine is available that offers many advantages and you can purchase it for

$160,000

today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of

$50,000

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

$20,000

per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is

$8,182

per year. The market value today of the current machine is

$60,000.

Your company's tax rate is

35%,

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

12%.

Should your company replace its year-old machine?

Question content area bottom

Part 1

The NPV of replacing the year-old machine is

$enter your response here.

(Round to the nearest dollar.)

Part 2

Should your company replace its year-old machine?(Select the best choice below.)

A.

Yes, there is a profit from replacing the machine.

B.

Answer & Explanation Solved by verified expert
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