Replacement problem when old machine has a positive book value. Assume the same facts as in Problem except that the new machine will have a salvage value of $12,000. Assume further that the old machine has a book value of $40,000, with a remaining life of eight years. If replaced, the old machine can, at present, be sold for $15,000. Should the machine replacement be made?
Problem
Basic replacement problem. The Virginia Company is considering replacing a riveting machine with a new design that will increase the earnings before depreciation from $20,000 per year to $51,000 per year. The new machine will cost $100,000 and have an estimated life of eight years, with no salvage value.
The applicable corporate tax rate is 40%, and the firms cost of capital is 12%. The old machine has been fully depreciated and has no salvage value. Should it be replaced by the new machine?