One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over ten years and has no salvage value. You expect that the new machine will produce a gross profit (revenues minus operating expenses other than depreciation) of $40,000 per year for the next ten years. The current machine is expected to produce a gross profit of $20,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value in the end. The market value today of the current machine is $50,000. Your company’s tax rate is 45%, and the cost of capital for this type of equipment is 10%.
Based on the calculation of incremental free cash flows, what is the NPV of using the new machine to replace its one-year-old machine?