ALC corp is considering to replace an old machine used in production with a new technically improved one. This old machine has 10 more years of useful life, its current book value is $800,000 and its current market value is $950,000. After 10 years the residual value will be $200,000. The old machine will be sold if company decides to buy the new machine.
The new technically improved machine costs $2 million. It will be used for 10 years and the residual value will be $500,000. The new machine will have lower operating costs.
The operating costs information for both machines are as follows
Old machine new machine
For first 5 years $400,000 $100,000
For next 3 years $450,000 $180,000
For last 2 years $480,000 $240,000
Both machines will be overhauled after 5 years (end of year 5). If the company continued with old machine the overhaul cost will be $80,000. Overhaul cost for new machine will be $50,000.
The company’s income tax rate is 25%. The required rate is 12%.
Calculate the net after tax cash investment if new machine is purchased.
This is the answer that I got can anyone teel me if this is right or wrong?
initial investment (2,000,000)
(2,000,000)*.25= (500,000)
(2,500,000)
sale of current machn. 950,000
= (1,550,000)