Question

# One year? ago, your company purchased a machine used in manufacturing for \$115,000. You have learned...

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 \$165,000 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 \$45,000 per year for the next 10 years. The current machine is expected to produce a gross margin of \$21,000 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 \$10,455per year. The market value today of the current machine is \$45,000. Your? company's tax rate is 42%?, and the opportunity cost of capital for this type of equipment is 12%.

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. No comma there is a loss from replacing the machine.No, there is a loss from replacing the machine.

B. Yes comma there is a profit from replacing the machine.

 Incremental After tax Gross margin (45000-21000)(1-42%) 13920 Ttax sheild on additional depreciation(16500-10455)*42% 2,539 Total Annual cash inflows for 10 years 16,459 Annuity for 10 years at 12% 5.6502 Present value of Annual cash inflows 92,996 Less: Net initial investment Cost of machine 165000 Less: Salvage value of curent machine 45,000 Less: tax sheild on loss on current machine 25011 (10455*10 - 45000)*42% Net Initial cash outflows 94989 Net present value -1,993 NPV of replacing the machine is (\$ 1993) Option is: A. there is a loss on replacing the machine.

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