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Change in value of the company if it accepts the replacement project

XYZ Manufacturing Corporation currently has production equipment that has 4 years of remaining life. The equipment was purchased a year ago at a cost of \$10,000. The annual depreciation for this machine is \$1,800 and its expected salvage value is \$1,000. The equipment can be sold today for \$8,000. The company has been considering the purchase of a new machine that will replace the existing one. The new equipment costs \$15,000 and would increase sales (through increased production) by \$2,000 per year and decrease operating costs by \$1,000 per year. The equipment falls into the 3-year MACRS class and will be worthless after 4 years. The applicable depreciation rates are 0.33, 0.45, 0.15, and 0.07. The company's tax rate is 40 percent and its cost of capital is 12 percent. By how much would the value of the company change if it accepts the replacement project?

A.\$2,112.05

B 318.27

C.-\$5,887.95

D.\$ 552.62

E.\$1,497.91

Solution Summary

In an Excel format, the solution shows the calculation and the answer to the problem.

\$2.19