One year ago, your company purchased a machine used in manufacturing for $115,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over 10 years and has no savage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $50,000 per year for the next 10 years. The current machine is expected to produce a gross margin at $21,000 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, so depreciation expense margin for the current machine is $10, 455 per year. The market value today of the current machine is $60,000. Your company's rate is 42%, and the opportunity cost of capital for this type of equipment is 12%. Should your company replace its year-old machine?
The NPV of replacing the year-old machine is $.