Question: A company is considering replacing an existing machine. The old machine was purchased 5 years ago for $100 million and is being depreciated to zero

  1. A company is considering replacing an existing machine. The old machine was purchased 5 years ago for $100 million and is being depreciated to zero on a straight-line basis over 10 years. The new machine costs $150 million and will be depreciated to zero over 5 years on a straight-line basis. The old machine can be sold to another company for $20 million. Assume a discount rate of 12% and a 25% tax rate.

What is the Present Value of the depreciation tax shield associated with replacing the machine?

What is the Free Cash Flow (FCF) at Time 0?

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