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Purchase of a new machine to replace an obsolete one

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The Chen company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has both a book value and a market value of zero; it is in good working order, however, and will last physically for at least another 10 years. The proposed replacement machine will preform the operation so much more efficiently that Chen's engineers estimate it will produce after tax cash flow (labor saving and depriciation) of $9,000 per year. THe new machine will cost $40,000 delivered and installed and its economic life is estimated to be 10 years. It has zero salvage value. The firm WACC is 10%, and its marginal tax rate is 35%. Should Chen buy a new machine?

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Solution Summary

The expert purchases a new machine to replace an obsolete one.

Solution provided by:
Sonia Agarwal, CA
Education
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
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