Replacement Problem What if we have an old asset to replace with a new asset?

Replacement Problem

What if we have an old asset to replace with a new asset?

Original Machine Initial cost = 100,000

Annual depreciation = 9,000

Purchased 5 years ago

Book Value = 55,000

Salvage today = 65,000

Salvage in 5 years = 10,000

New Machine Initial cost = 150,000

5-year life

Salvage in 5 years = 0

Cost savings = 50,000 per year

3-year MACRS depreciation

Required return = 10%

Tax rate = 40%