Problem: ABC company purchased a machine 5 years ago at cost of $100000. The machine had an expected life of 10 years at the time of purchase, and an expected salvage value of $10,000 at the end of the 10 years.Taxation depreciation allowable is 10 percent per year over ten years.
A new machine can be purchased for $150,000 including installation costs. During its 5 years life, it will reduce cash operating expense by $40,000 per year. Additional revenues of $12000 per year are also expected. At the end of its useful life the machine is estimated to be worthless. for tax purpose the new machine will be depreciated over 3 years , rather than its 5 years economic life. The old machine can be sold today for $ 65000. the company tax rate is 40%. the appropriate discount rate is 16%. Should ABC replace old machine? show all workings to justify your answer.