Rhule Company wants to replace an existing machine with a new one which will cost $ 4
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Rhule Company wants to replace an existing machine with a new one which will cost $ million dollars to purchase. The old machine was purchased years ago for $ million dollars, and was being depreciated straight line to a zero salvage value over its ten year life. The old machine can be sold today for $ million dollars. The new machine is expected to be depreciated straight line over its ten year economic life to a zero salvage value. It is assumed that it could be sold at the end of the year ten for $ million. Rhule expects to increase the investment in net working capital NWC by $ million, if the new machine is purchased. The NWC will be recovered at the end of the projects life. The acquisition of the new machine would increase sales by $ million per year for ten years, and operating expenses excluding depreciation would also increase by $ million per year. The company has a marginal tax rate of and a cost of capital of Should the old machine be replaced? Rhule is concerned that the cost of capital could be off basis points. Is his concern justified? Explain.
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