One year ago, your company purchased a machine used in manufacturing for $115,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $160,000 today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $35,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $24,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is $10,455 per year. The market value today of the current machine is $55,000. Your company's tax rate is 35%, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace its year-old machine? The NPV of replacing the year-old machine is $_____________ (Round to the nearest dollar.) Should your company replace its year-old machine? (Select the best choice below.) A. Yes, there is a profit from replacing the machine. B. No, there is a loss from replacing the machine.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 4P: Although the Chen Company’s milling machine is old, it is still in relatively good working order and...

See similar textbooks

Related questions

Concept explainers

Topic Video

Question

One year ago, your company purchased a machine used in manufacturing for

$115,000.

You have learned that a new machine is available that offers many advantages and you can purchase it for

$160,000

today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of

$35,000

per year for the next 10 years. The current machine is expected to produce a gross margin of

$24,000

per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is

$10,455

per year. The market value today of the current machine is

$55,000.

Your company's tax rate is

35%,

and the opportunity cost of capital for this type of equipment is

11%.

Should your company replace its year-old machine?

The NPV of replacing the year-old machine is

$_____________

(Round to the nearest dollar.)

Should your company replace its year-old machine? (Select the best choice below.)

Yes, there is a profit from replacing the machine.

No, there is a loss from replacing the machine.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions