One year ago, your company purchased a machine used in manufacturing for $100,000. You have learned
that a new machine is available that offers many advantages and you can purchase it for $155,000 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
$22,000 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 $9,091 per year. The
market value today of the current machine is $60,000. Your company's tax rate is 42%, and the opportunity
cost of capital for this type of equipment is 11%. 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.)
A. Yes, there is a profit from replacing the machine.
B. No, there is a loss from replacing the machine.
