The Tomas School of Falconry is considering replacing a piece of equipment used in making falconry perches. The existing machine has 3 years useful life remaining. The machine had an original cost of $50,000, 3 years ago, and is projected to have a salvage value of $5,000 in 3 years time. The existing machine has a current market value of $30,000. The company has been depreciating the machine down to its salvage value using straight line depreciation. The new machine has a useful life of 3 years, will cost $75,000, and will be depreciated using the MACRS 3 year table (yr-1 33.33%, yr-2 44.44%, yr-3 14.82%, yr-4 7.41%). The new machine will have an expected salvage value of $8,000 in 3 years time. The new machine will save $40,000 a year in costs. There will be no change in Net Working Capital usage for the new machine versus the old machine. The company is in the 40% tax bracket. The Tomas School of Falconry has 12 million shares of stock outstanding with a current market price of $11.30. The stock’s beta is 2.3. The return on the S&P500 is expected to be 11%, while the return on 1 year Treasury bills is 2.2%. The company has $30 million in face value of debt outstanding. The debt has a price of 93’21. The bonds have a coupon rate of 7%, and pay coupons semi-annually. The bonds will mature in 25 years. Based on NPV should the School replace the existing machine?

Answer rating: 100% (QA)

Should the Falconry School Replace the Equipment NPV Analysis Step 1 Calculate the Cash Flows Existing Machine Book Value 30000 current market value D... View the full answer