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One year ago, your company purchased a machine used in manufacturing for $105,000.
One year ago, your company purchased a machine used in manufacturing for
$105,000. You have learned that a new machine is available that offers many advantages and 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
$40,000 per year for the next 10 years. The current machine is expected to produce a gross margin of
$24,000 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
$9,545 per year. The market value today of the current machine is
$55,000. Your company's tax rate is 38 %
and the opportunity cost of capital for this type of equipment is
11%. Should your company replace its year-old machine?
Show detailed steps including how to calculate the after-tax proceeds from the sales including tax savings
