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)|
|A. there is a loss on replacing the machine.|
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