One year ago, your company purchased a machine used in manufacturing for $100,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $170,000 today. It will be depreciated on a straight-line basis over ten years, after which it has no salvage value. You expect that the new machine will contribute EBITDA (earnings beforeinterest, taxes, depreciation, and amortization) of $45,000 per year for the next ten years. The current machine is expected to produce an EBITDA of $24,000per year. The current machine is being depreciated on a straight-line basis over a useful life of 11years, after which it will have no salvage value, so depreciation expense for the current machine is $9,091 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your company's tax rate is 20%, and the opportunity cost of capital for this type of equipment is 10%. Is it profitable to replace the year-old machine?

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To determine whether it is profitable to replace the yearold machine we need to compare the incremen... View the full answer