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9. One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin (revenues minus operating expenses other than depreciation) of $40,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $20,000 per year. The current machine is being depreciated on a straight-line basis over a useful life of 11 years, and has no salvage value, so depreciation expense for the current machine is $10,000 per year. The market value today of the current machine is $50,000. Your company's tax rate is 45%, and the opportunity cost of capital for this type of equipment is 10%. Should your company replace its year-old machine? (Answer: NPV of replacing old machine is $3,915,514 > 0. This, it is profitable that we replace the machine.) 0 1 2 3 4 5 6 7 8 9 10 Year Revenues Costs Gross Profit Selling, general and administrative (eR Maintenance expenses) Depreciation EBIT Tax (35%) Incremental Earnings Add back depreciation Capital expenditure Subtract change in NWC Salvage cash flow 7 Incremental FCF