One year? ago, your company purchased a machine used inmanufacturing for
$105,000.
You have learned that a new machine is available that offersmany? advantages; you can purchase it for
$140,000
today. It will be depreciated on a? straight-line basis overten? years, after which it has no salvage value. You expect thatthe new machine will contribute EBITDA? (earnings before? interest,taxes,? depreciation, and? amortization) of
$45,000
per year for the next ten years. The current machine is expectedto produce EBITDA of
$25,000
per year. The current machine is being depreciated on a?straight-line basis over a useful life of 11? years, after which itwill have no salvage? value, so depreciation expense for thecurrent machine is
$9,545
per year. All other expenses of the two machines are identical.The market value today of the current machine is
$50,000.
Your? company's tax rate is
20 %,
and the opportunity cost of capital for this type of equipmentis
11 %
Is it profitable to replace the? year-old machine?
The NPV of the replacement is
