Problem 9-13 Question Help * One year ago, your company purchased a machine used
ID: 2820959 • Letter: P
Question
Problem 9-13 Question Help * One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $140,000 today. The CCA rate applicable to both machines is 30%; neither machine will have any long-term salvage value You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of $45,000 per year for the next ten years. The current machine is expected to produce EBITDA of $23,000 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 40%, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace its year-old machine? What is the NPV of replacement? The NPV of replacement is $(Round to the nearest dollar.)Explanation / Answer
Capital expenditure = $140,000
Depreciation new= 140000/10=14000
margin new=45000
Depreciationold= 120000/11=10909.1
Gross marginold=23000
MVold=50000,
BVold= 109090.9
Made a capital loss of 59090.9 (BV>MV)
Tax saving on loss (=59090.9*0.3)
= 17727.27
In Year 0, Cash inflow from sales of the old = 50,000 + (50,000)*(0.3) = $67727.27
Free cash flow for year 0 = 140000 - 67727.27 = $72272.73
Free cash flow for year 1 - 10 = (((45000 - 23000) - (14000 - 10909.1)) - ((45000 - 23000) - (14000 - 10909.1)) * .3) + (14000 - 10909.1)
= $16327.27
NPV = -72272.73 + pv of anuuity
= -72272.73 + 16327.27 * ( 1 - (1+.11)^(-10))/.11
= $29062.72
NPV of the repalcement = $29063