One year ago, your company purchased a machine used in manufacturing for $115,00
ID: 2782084 • Letter: O
Question
One year ago, your company purchased a machine used in manufacturing for $115,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over ten years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings before interest, taxes, depreciation, and amortization) of $55,000 per year for the next ten years. The current machine is expected to produce EBITDA of $23,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, after which it will have no salvage value, so depreciation expense for the current machine is $10,455 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 12%.
Is it profitable to replace the year-old machine. The NPV of the replacement is $ ?
Explanation / Answer
cost of new machine
150000
cost of old machine
115000
less sale price of current machine
50000
accumulated depreciation
10455
less tax benefits on loss on sale of current machine
21818
book value of machine
104545
net cash outflow
78182
less sale value ofold machine
50000
loss on sale of current machine
54545
Depreciation on new machine
depreciation on current machine
incremental depreciation
tax benefits on disposal of current machine
54545*40%
21818
15000
10455
4545
EBITDA of new machine
EBITA on current machine
incremental EBITDA
55000
23000
32000
year
incremental EBITDA
less incremental depreciation
Incremental EBT
less tax
incremental earning after tax
incremental earning after tax before depreciation = incremental EAT+depreciation
present value of incremental earnig after tax before depreciation = EATBD/(1=r)^n r= 12%
1
32000
4545
27455
10982
16473
21018
18766.07
2
32000
4545
27455
10982
16473
21018
16755.42
3
32000
4545
27455
10982
16473
21018
14960.2
4
32000
4545
27455
10982
16473
21018
13357.32
5
32000
4545
27455
10982
16473
21018
11926.18
6
32000
4545
27455
10982
16473
21018
10648.37
7
32000
4545
27455
10982
16473
21018
9507.476
8
32000
4545
27455
10982
16473
21018
8488.818
9
32000
4545
27455
10982
16473
21018
7579.302
10
32000
4545
27455
10982
16473
21018
6767.233
sum of present value of incremental cash flow
118756.4
less cash outflow
78182
net present value
40574.39
machine should be replaced as NPV is positive
cost of new machine
150000
cost of old machine
115000
less sale price of current machine
50000
accumulated depreciation
10455
less tax benefits on loss on sale of current machine
21818
book value of machine
104545
net cash outflow
78182
less sale value ofold machine
50000
loss on sale of current machine
54545
Depreciation on new machine
depreciation on current machine
incremental depreciation
tax benefits on disposal of current machine
54545*40%
21818
15000
10455
4545
EBITDA of new machine
EBITA on current machine
incremental EBITDA
55000
23000
32000
year
incremental EBITDA
less incremental depreciation
Incremental EBT
less tax
incremental earning after tax
incremental earning after tax before depreciation = incremental EAT+depreciation
present value of incremental earnig after tax before depreciation = EATBD/(1=r)^n r= 12%
1
32000
4545
27455
10982
16473
21018
18766.07
2
32000
4545
27455
10982
16473
21018
16755.42
3
32000
4545
27455
10982
16473
21018
14960.2
4
32000
4545
27455
10982
16473
21018
13357.32
5
32000
4545
27455
10982
16473
21018
11926.18
6
32000
4545
27455
10982
16473
21018
10648.37
7
32000
4545
27455
10982
16473
21018
9507.476
8
32000
4545
27455
10982
16473
21018
8488.818
9
32000
4545
27455
10982
16473
21018
7579.302
10
32000
4545
27455
10982
16473
21018
6767.233
sum of present value of incremental cash flow
118756.4
less cash outflow
78182
net present value
40574.39
machine should be replaced as NPV is positive
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.