The Feldwyn Company is using a machine whose original cost was $72,000. The machine is two years old and has a current market value of $16,000. The asset is being depreciated over a 12 year original life toward a zero estimated final salvage value. There are no taxes associated with the sale of the old machine. Depreciation is on a straight-line basis.
Management is contemplating the purchase of a replacement that costs $75,000 and has an estimated salvage value of $10,000. The new machine will have a greater capacity and annual sales are expected to increase by $10,000. Operating efficiency with the new machine will also produce expected saving of $10,000 per year. Depreciation is on a straight-line basis over a ten year life.
Should the firm replace the asset, if the appropriate discount rate for the machine is 8% and the tax rate is 50%?