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 before?interest, taxes,? depreciation, and? amortization) of $40,000 peryear for the next ten years. The current machine is expected toproduce EBITDA of $20,000 per year. The current machine is beingdepreciated on a?straight-line basis over a useful life of 11?years, 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 45%?,and the opportunity cost of capital for this type of equipment is10%. Is it profitable to replace the? year-old machine?

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We need to calculate Present value of incremental cash flow ifnew machine id purchased If it is positive then it 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 before?interest, taxes,? depreciation, and? amortization) of $40,000 peryear for the next ten years. The current machine is expected toproduce EBITDA of $20,000 per year. The current machine is beingdepreciated on a?straight-line basis over a useful life of 11?years, 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 45%?,and the opportunity cost of capital for this type of equipment is10%. Is it profitable to replace the? year-old machine?