One year ago, your company purchased a machine used in manufacturing for $115,000. You have learned that a new machine is available that offers many advantages and that you can purchase it for $160,000 today. The CCA rate applicable to both machines is 40%; neither machine will have any long-term salvage value.
You expect that the new machine will produce earnings before interest, taxes, depreciation, and amortization (EBITDA) of $45,000 per year for the next 10 years. The
current machine is expected to produce EBITDA of $22,000 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 45%, and the opportunity cost of capital for this type of equipment is 12%. Should your company replace its year-old
machine?
What is the NPV of replacement?