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Should the firm replace the machine

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Point 1: New machine cost 240,000 and is expected to last for 6 years. the current one, obtained 2 years ago costed 160,000 and could be sold for 140,000 today if it is replaced. otherwise, it will be kept for 6 more years. both machines are fully depreciated using the straight-line method over their economic lives. the salvage value of both machines are zero. the new machine will allow the company to save 35,000 in cash operating expenses each year,thus the operating income on a before-tax basis, excluding depreciation will increase from 15,000 to 50,000.

(given 30% as tax rate and 10% as cost of capital)

Question 1: Should the firm replace the machine?

Question 2: what is the investment outlay at year 0 ?

Question 3: what is the change in depreciation tax shield?

Question 4: annual after-tax operating cash flow from year 1-6?

Question 5: NPV?

Reference no: EM132495340

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