Ace Software, is contemplating replacing some existing equipment with some new hardware. The existing equipment, carried on the books at $800, is being depreciated using the straight line method to a salvage value of $80 over its remaining life of 8 years. Ace could scrap the equipment today for $900.
The new machinery would also be depreciated using the straight-line method to a salvage value of 20% of its purchase price over an expected life of 8 years. The new equipment would be expected to lower annual operating expenses by $750. The new machinery would require additional net working capital of $160. Ace has a required return of 12% and a marginal tax rate of 40%.
Find the max amount the firm would be willing to pay for the new equipment for the replacement to be worthwhile.