By how much would the value of the company change

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Garcia paper currently has production equipment that has 4 years of remaining life. The equipment was purchased a year ago at a cost of $5,000. The annual depreciation for this machine is $900 and its expected salvage value is $500. The equipment can be sold today for $3,900. The company has been considering the purchase of a new machine that will replace the existing one. The new equipment costs $8,000 and would increase sales (through increased production) by $1,000 per year and decrease operating costs by $500 per year. The equipment falls into the 3-year MACRS class and will be worthless after 4 years. The applicable depreciation rates are 0.33, 0.45, 0.15, and 0.07. The company's tax rate is 20 percent and its cost of capital is 10 percent.

Question 1: By how much would the value of the company change if it accepts the replacement project?

Reference no: EM132549859

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