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 $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.

Answer 1

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.