Opportunity cost of capital for this type of equipment

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Reference no: EM131088307

One year ago, your company purchased a machine used in manufacturing for $120,000. You have learned that a new machine is available that offers many advantages; 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 $60,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $25,000 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 $10,909 per year. The market value today of the current machine is $60,000. Your company tax rate is 45%, 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 nearst dollar)

Should your company replace its year-old machine..... Yes or No

Reference no: EM131088307

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