The Cement Corp is planning to replace an existing assembly with a more modern version. the old equipment was purchased 5 years ago for $500,000 and depreciated to a zero value over the 5 years. The new equipment cost $1,000,000 and will be depreciated using the straight-line method over its 5 year economic life. The salvage value at the end of the 5th year is expected to be $80,000. The new machine will reduce costs by $600,000. the old equipment can be sold for $40,000. They will have to set aside net working capital of $20,000 in year 0.
- If the cost of capital is 16% and the tax rate is 40%, should they replace the machine?
- If they estimate that additional net working capital of $30,000 in year 1, $40,000 in year 2, and $50,000 in year 3 will be required, how that will affect the answer.