One year ago, your company purchased a machine used in manufacturing for $95,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $50,000 per year for the next 10 years The current machine is expected to produce EBITDA of $25,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $8,636 per year. All other expenses of the two machines are identical The market value today of the current machine is $50,000. Your company's tax rate is 30%, and the opportunity cost of capital for this type of equipment is 12% Is it profitable to replace the year-old machine?

One year ago, your company purchased a machine used in manufacturing for $95,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $50,000 per year for the next 10 years The current machine is expected to produce EBITDA of $25,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $8,636 per year. All other expenses of the two machines are identical The market value today of the current machine is $50,000. Your company's tax rate is 30%, and the opportunity cost of capital for this type of equipment is 12% Is it profitable to replace the year-old machine?

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 10P: Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6...

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Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
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One year ago, your company purchased a machine used in manufacturing for $95,000. You have learned that a new machine is available that offers many advantages, you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over 10 years, after which it has no salvage value You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $50,000 per year for the next 10 years The current machine is expected to produce EBITDA of $25,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $8,636 per year. All other expenses of the two machines are identical The market value today of the current machine is $50,000. Your company's tax rate is 30%, and the opportunity cost of capital for this type of equipment is 12%. Is it profitable to replace the year-old…
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