Question Builtrite A is considering replacing a 10 year old machine that originally cost $30,000, has a current book value of $10,000 with five years of expected life left. The machine is being depreciated over its 15 year life down to a terminal value of $0. Currently, this machine has an expected salvage value of $15,000. The replacement machine that Builtrite is considering would cost $80,000 and be depreciated down to $0 over its five year expected life. At the end of five years the new machine is expected to have a salvage value of $40,000. Builtrite expects to save $30,000 (before depreciation and taxes) annually due to the new machine efficiencies. Assume straight-line depreciation, a 34% marginal tax rate and an expected return of 20%. Should Builtrite A purchase this machine?
Question
Builtrite A is considering replacing a 10 year old machine that originally cost $30,000, has a current book
value of $10,000 with five years of expected life left. The machine is being depreciated over its 15 year life down to a terminal value of $0. Currently, this machine has an expected salvage value of $15,000. The replacement machine that Builtrite is considering would cost $80,000 and be depreciated down to $0 over its five year expected life. At the end of five years the new machine is expected to have a salvage value of $40,000. Builtrite expects to save $30,000 (before depreciation and taxes) annually due to the new machine efficiencies. Assume straight-line depreciation, a 34% marginal tax rate and an expected return of 20%. Should Builtrite A purchase this machine?
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