The Koke Bottling Company is contemplating the replacement of one of its bottling machines. The...
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The Koke Bottling Company is contemplating the replacement of one of its bottling machines. The old machine has a book value of $300,000 and a remaining useful life of 3 years. The firm expects to sell the old machine for $50,000 in 3 years; it can sell it now to another firm in the industry for $200,000. The old machine is being depreciated toward a zero book value using the straight line method. The new machine has a purchase price of $1,000,000, an estimated useful life and MACRS class life of 3 years, and an estimated market value of $170,000 at the end of the third year. Annual savings of $300,000 will be realized if the new machine is installed. If the marginal tax rate is 40% and the cost of capital is 10%, should the firm purchase the new machine? Find NPV.
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