Question: The Gehr Company is considering the purchase of a new
The Gehr Company is considering the purchase of a new machine tool to replace an obsolete one. The machine being used for the operation has both a book value and a market value of $0; it is in good working order, however, and will last physically for at least another 10 years. The proposed replacement machine will perform the operation so much more efficiently that Gehr engineers estimate it will produce after-tax cash flows (cost savings) of $9,000 per year. The new machine will cost $40,000 delivered and installed, and its useful life is estimated to be 10 years. Its expected salvage value is $0. The firm’s required rate of return is 10 percent, and its marginal tax rate is 40 percent. Should Gehr buy the new machine?
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