ill . = = ST BIU a Av ste x & fic E B Problem 9-17 Une year ago, your company purenased a machine used in manuracturing 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 straightline 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 25%, and the opportunity cost L! win in CL. 1 L New machine cost (year 0) Current machine purchase price Current machine depreciation Current machine book value Current machine market value New machine depreciation Old EBITDA New EBITDA Tax rate Cost of capital Life of machines (S150,000) $110,000 $10,000 per year $100,000 $50,000 $15.000 per year $20.000 per year $40.000 per year 25% 10% 10 years Capital gain from old machine sale Year O incremental free cash flow Incremental EBITDA Incremental depreciation Annual benefit of replacement Net Present Value of replacement O 1