1. You are considering replacing a machine in your factory. The current machine cost $900,000 seven years ago. It is being depreciated for tax purposes on a straight-line basis over its ten year life. The old machine can be sold today for $250,000 or be worthless in three years. The new machine would cost $1,200,000 and it would depreciate straight line to zero over three years. If the new machine is purchased, it would be operated for three years and then sold for $150,000. You are considering the new machine because it would result in labor savings of $350,000 per year. If you purchase the new machine, net working capital requirements will increase by $90,000 because of the need for additional spare parts. 
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3. If your tax rate is 35% and your cost of capital is 8% per year, what is the net present value of purchasing the new machine?

Answer rating: 100% (QA)

Given information Old machine cost 900000 Old machine salvage ... View the full answer