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Big-time Ltd is thinking about replacing an old machine with a new one. The old one cost $500,000 five year ago and the new one will cost $350,000.
Big-time Ltd is thinking about replacing an old machine with a new one. The old one cost $500,000 five year ago and the new one will cost $350,000. The new machine will be depreciated prime cost to zero over its 5 year life. It will probably be worth about $50000 after 5 years.
The old machine is being depreciated at a rate of $50,000 per year. Big-time can sell it now for $120,000. In five years, it will probably be worth nothing. The new machine will save $120,000 per year in operating costs. The tax rate is 30%, tax is paid in the year of income, and the after tax discount rate is 12 percent. Should Big-time purchase the new computer?
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