The Dauten Toy Corporation is currently using a machine that was purchased 2 years ago....
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The Dauten Toy Corporation is currently using a machine that was purchased 2 years ago. Originally, the machine cost $6,000, had a depreciable life of 5 years using the straight-line method towards a basis of $1,000 book value at the end of the 5th year (three years from today). Today, the old machine could be sold for $3,000, but if its kept for the next 3 years, it will be worthless. A replacement machine costs $8,000, has an estimated useful life of 3 years at which time the estimated market value is $1,320. It falls into the MACRS 5-year class life. The new machines greater efficiency would cause sales to increase by $1,000 per year, and operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $500. Dautens marginal tax rate is 40%, and its cost of capital is 10%. Should it replace the old machine?( find NPV)
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