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A company manufactures snowsuits. This company is considering purchasing a new sewing machine at a cost of $2.5 million. Its existing sewing machine was purchased 5 years ago at a price of $1.8 million. Six months ago, the company spent $55,000 to keep it operational. The existing sewing machine can be sold today for $260,000. The new sewing machine would require a one-time $85,000 training cost. Operating costs would decrease by the following amounts from year 1 to 7:
Year 1: $390,000Year 2: $400,000Year 3: $411,000Year 4: $426,000Year 5: $434,000Year 6: $435,000Year 7: $436,000
The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $380,000. This new equipment would require maintenance costs of $95,000 at the end of the fifth year. The cost of capital is 9%.Use the net present value method to determine if the company should purchase the new machine to replace the existing machine and state the reason for your conclusion.
Alternatively, ABC can sell 9.5 percent coupon bonds with a 2-year maturity and $1,000 par value at a price of $950.00. How many percentage points lower is the interest rate on the less expensive debt instrument?
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