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. | |||||||

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