one year ago, your company purchased a machine used in manufacturing for$120,000. you have learned that a new machine is available that offers manyadvantages; you can purchase it for $200,000 today. it will be depreciated on astraight-line basis over 5 years, after which it has no salvage value. you expect thatthe new machine will produce ebitda (earnings before interest, taxes, depreciation,and amortization) of $100,000 per year for the next 5 years. the current machine isexpected to produce ebitda of $45,000 per year. the current machine is beingdepreciated on a straight-line basis over a useful life of 6 years, after which it willhave no salvage value, so depreciation expense for the current machine is $20,000 peryear. all other expenses of the two machines are identical. the market value today ofthe current machine is $80,000. your company’s tax rate is 45%, and the opportunitycost of capital for this type of equipment is 12%. is it profitable to replace the year-old machine?
