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Question 07: Tolstoy Welders is planning to replace an old machine with a new one...

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Question 07: Tolstoy Welders is planning to replace an old machine with a new one to improve efficiency In its production process. The machine will increase the efficiency as it is more modern and will result in an incremental savings of $80,000 per year. The old machine was bought 3 years ago at a cost of $270,000 The new machine will cost $420,000. Both machines have useful lives of 6 years. The machines are depreciated to zero for tax purpose over the six-year life using a straight-line depreciation method. The tax rate is 40% and the required rate of return is 13%. The old machine has no salvage value at the end of its life but can be sold now at a cost of $100,000. The new machine will have a salvage value of $80,000 at the end of its life. Should the new machine be purchased? [6 Marks]

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