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Determine the existing machine should be replace or not

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Question: A corporation is considering replacing an existing machine with a new machine. The new machine costs $60,000 plus installation costs of $2,000. It will generate revenues of $155,000 annually and cash expenses annually of $100,000. It will be depreciated to a salvage of $6,000 over a seven-year life using the straight-line method. The old machine has a book value of $40,000 and a remaining useful life of 5 years. It can be sold immediately for $15,000. If retained, the machine will generate revenues of $150,000 and cash expenses annually of $110,000. Assuming the firm has a marginal cost of capital of 12% and is in the 34% marginal tax bracket, should it replace the existing machine? Assume that this is a one-off decision - the choice is either keep the existing machine for five years or buy the new machine and run it for seven years.

Reference no: EM131435911

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