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Basic replacement problem. The Virginia Company is considering replacing a riveting machine with a new design that will increase the earnings before depreciation from $20,000 per year to $51,000 per year. The new machine will cost $100,000 and have an estimated life of eight years, with no salvage value.

The applicable corporate tax rate is 40%, and the firms cost of capital is 12%. The old machine has been fully depreciated and has no salvage value. Should it be replaced by the new machine?

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Category:- Basic Finance
Reference No.:- M92001144

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