Problem:
A five year old machine cost $15,000 when new and is being depreciated on a a straight line basis to a zero salvage value in 5 more years ( 10 years total life.) the operating expenses for this machine are $2500 as of the end of each year. At the end of its life it will be replaced by a new machine that costs $22,000, will last 10 years and have operating costs of $1500 a year. Should we replace it now instead of waiting 5 years? The interest rate is 10% a year and the tax rate 50%.
Requirement:
Question 1: What is the current book value of the old machine? Please explain in detail and also provide step by step solution.