One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned...

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One year ago, your company purchased a machine used inmanufacturing for $110,000. You have learned that a new machine isavailable that offers many advantages; you can purchase it for$150,000 today. It will be depreciated on a straight-line basisover ten years, after which it has no salvage value. You expectthat the new machine will contribute EBITDA (earnings beforeinterest, taxes, depreciation, and amortization) of $60,000 peryear for the next ten years. The current machine is expected toproduce EBITDA of $22,000 per year. The current machine is beingdepreciated on a straight-line basis over a useful life of 11years, after which it will have no salvage value, so depreciationexpense for the current machine is $10,000 per year. All otherexpenses of the two machines are identical. The market value todayof the current machine is $50,000. Your company's tax rate is 35%,and the opportunity cost of capital for this type of equipment is10%. Is it profitable to replace the year-old machine? The NPV ofthe replacement is $nothingm. (Round to the nearest dollar.)

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4.5 Ratings (1004 Votes)

Answer Depreciation every year for new machine 15000010 15000 Depreciation every year for Old machine 11000011 10000 EBITDA new machine 60000 EBITDA Old Machine 22000 Market Value of old machine 50000 Book value 110000 See Answer

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One year ago, your company purchased a machine used inmanufacturing for $110,000. You have learned that a new machine isavailable that offers many advantages; you can purchase it for$150,000 today. It will be depreciated on a straight-line basisover ten years, after which it has no salvage value. You expectthat the new machine will contribute EBITDA (earnings beforeinterest, taxes, depreciation, and amortization) of $60,000 peryear for the next ten years. The current machine is expected toproduce EBITDA of $22,000 per year. The current machine is beingdepreciated on a straight-line basis over a useful life of 11years, after which it will have no salvage value, so depreciationexpense for the current machine is $10,000 per year. All otherexpenses of the two machines are identical. The market value todayof the current machine is $50,000. Your company's tax rate is 35%,and the opportunity cost of capital for this type of equipment is10%. Is it profitable to replace the year-old machine? The NPV ofthe replacement is $nothingm. (Round to the nearest dollar.)