Galveston Shipyards is considering the replacement of an eight-year-old riveting machine with a new one that will
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Galveston Shipyards is considering the replacement of an eight-year-old riveting machine with a new one that will increase earnings before depreciation from $27,000 to $54,000 per year. The new machine will cost $82,500, and it will have an estimated life of eight years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period. The firm’s marginal tax rate is 40 percent, and the firm’s required rate of return is 12 percent. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one?
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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1 Initial investment outlay Cost of new machine 82500 Net initial inv...View the full answer
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