Question: Replacement Decision EXAMPLE: We are considering replacing an old machine with a new machine. The new machine will cost $5million and will produce FCFF of

Replacement Decision EXAMPLE: We are considering replacing an old machine with

Replacement Decision EXAMPLE: We are considering replacing an old machine with a new machine. The new machine will cost $5million and will produce FCFF of $4.5million/yr for the next 5 years. The new machine would be depreciated on straight line basis to a BV=0 and will have salvage value of 1.25million. The existing machine has a book value of $1m and can be sold today for $2m. If left in place, it will produce FCFF of $2m/yr for the next 5 years, and it would have a BV=0 and salvage value of $0.5m in 5 years. Should we replace the machine? The WACC for both machines is 10% and the firm's tax rate is 40%

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