One year? ago, your company purchased a machine used in manufacturing for $ 110 comma 000....

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One year? ago, your company purchased a machine used inmanufacturing for $ 110 comma 000. You have learned that a newmachine is available that offers many advantages and you canpurchase it for $ 140 comma 000 today. It will be depreciated on a?straight-line basis over 10 years and has no salvage value. Youexpect that the new machine will produce a gross margin? (revenuesminus operating expenses other than? depreciation) of $ 55 comma000 per year for the next 10 years. The current machine is expectedto produce a gross margin of $ 20 comma 000 per year. The currentmachine is being depreciated on a? straight-line basis over auseful life of 11? years, and has no salvage? value, sodepreciation expense for the current machine is $ 10 comma 000 peryear. The market value today of the current machine is $ 55 comma000. Your? company's tax rate is 45 %?, and the opportunity cost ofcapital for this type of equipment is 12 %. Should your companyreplace its? year-old machine?

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4.2 Ratings (640 Votes)

incremental gross margingross margin on new machine55000gross margin on old machine20000incremental gross margin35000incremental depreciationdepreciation on new machine14000depreciation on old machine 1100001110000incremental depreciation4000sale value of old machine55000book value of old machine See Answer

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One year? ago, your company purchased a machine used inmanufacturing for $ 110 comma 000. You have learned that a newmachine is available that offers many advantages and you canpurchase it for $ 140 comma 000 today. It will be depreciated on a?straight-line basis over 10 years and has no salvage value. Youexpect that the new machine will produce a gross margin? (revenuesminus operating expenses other than? depreciation) of $ 55 comma000 per year for the next 10 years. The current machine is expectedto produce a gross margin of $ 20 comma 000 per year. The currentmachine is being depreciated on a? straight-line basis over auseful life of 11? years, and has no salvage? value, sodepreciation expense for the current machine is $ 10 comma 000 peryear. The market value today of the current machine is $ 55 comma000. Your? company's tax rate is 45 %?, and the opportunity cost ofcapital for this type of equipment is 12 %. Should your companyreplace its? year-old machine?