Question

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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Answer 1