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Piliot plus pens is deciding when to replace its old machine. The machine's current salvage value is $2.34 million. Its current book value is $1.43 million. If not sold, the old machine will require maintenance costs of $975,000 at the end of the year for the next five years. Depreciation on the machine is $286,000 per year. At the end of five years, it will have a salvage value of $227,500 and a book value of $0. A replacement machine costs $5.46 million now and requires maintenance costs of $344,000 at the end of each year during its economics life of five years. At the end of five years, the new machine will have a salvage value of $780,000. It will be fully depreciated by the straight-line method. Pilot will need to purchase this machine regardless of what choice it makes today. The corporate tax rate 34 percent and the appropriate discount rate is 12 percent. The company is assumed to earn sufficient revenues to generate tax shields from depreciation. Should Pilot Plus replace the old machine now or at the end of five years?

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M91266618

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