Management: The purchase of a new machine to replace an obsolete one - Essay Example

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Management: The purchase of a new machine to replace an obsolete one

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Subject: Miscellaneous
Type: Essay
Level: Masters
Pages: 2 (500 words)
Downloads: 2
Author: casimer75

Extract of sample "Management: The purchase of a new machine to replace an obsolete one"

Q1) ' The Sampras Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has botha book value and a market value of zero; it is in good working order, however, and will last physically for at least another 10 years. The proposed replacement machine will perform the operation so much more efficiently that Sampras engineers estimate it will produce after-tax cash flows (labor savings and depreciation) of $9,000 per year. The new machine will cost $40,000 delivered and installed, and its economic life is estimated to be 10 years.

It has zero salvage value. The firm's cost of capital is 10 percent, and its marginal tax rate is 35 percent. Should Sampras buy the new machineThe consideration for the new machine purchase can be evaluated by using the NPV analysis of the two options, or simply the analysis of incremental cash flows.Based on the following analysis given below, the purchase of new machine should be done as it will result in a positive NPV of the project.

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