One year ago, your company purchased a machine used in manufacturing for $110,000. 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 $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 $10,000 per year. The market value today of the current machine is $65,000. Your company's tax rate is 45%, and the opportunity cost of capital for this type of equipment is 10%.
What is the NPV of replacing the year-old machine?
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