The NPV of replacing the year-old machine is $ (Round to the nearest dollar.) Should your company replace its year-old machine? (Select the best choice below.) OA. Yes, there is a profit from replacing the machine. OB. No, there is a loss from replacing the machine.
The NPV of replacing the year-old machine is $ (Round to the nearest dollar.) Should your company replace its year-old machine? (Select the best choice below.) OA. Yes, there is a profit from replacing the machine. OB. No, there is a loss from replacing the machine.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
Related questions
Question
![One year ago, your company purchased a machine used in manufacturing for $105,000. 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 $40,000 per year for the next 10 years. The current machine is
expected to produce a gross margin of $24,000 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 $9,545 per year. The market value today of the current machine is $45,000. Your company's tax rate
is 38%, and the opportunity cost of capital for this type of equipment is 12%. Should your company replace its year-old machine?
The NPV of replacing the year-old machine is $. (Round to the nearest dollar.)
Should your company replace its year-old machine? (Select the best choice below.)
O A. Yes, there is a profit from replacing the machine.
OB. No, there is a loss from replacing the machine.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3c1b79bd-ec90-48fd-be7a-92b723031db9%2Fa0bc9003-2e65-46b9-85fe-6f5525752e14%2Fphljmiu_processed.png&w=3840&q=75)
Transcribed Image Text:One year ago, your company purchased a machine used in manufacturing for $105,000. 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 $40,000 per year for the next 10 years. The current machine is
expected to produce a gross margin of $24,000 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 $9,545 per year. The market value today of the current machine is $45,000. Your company's tax rate
is 38%, and the opportunity cost of capital for this type of equipment is 12%. Should your company replace its year-old machine?
The NPV of replacing the year-old machine is $. (Round to the nearest dollar.)
Should your company replace its year-old machine? (Select the best choice below.)
O A. Yes, there is a profit from replacing the machine.
OB. No, there is a loss from replacing the machine.
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