Question

You are facing the decision of whether to replace an old machine at your factory. A new machine will cost $22 to purchase it now and the yearly maintenance expenses will be $6 a year. The new machine has a life of 5 years at which time it is estimated it can be sold for $10. The new machine will be depreciated down to zero over 5 years using straight-line depreciation. If the new machine is purchased, the old machine can be sold today for $16. However, if the old machine is not replaced today, it will continue to be depreciated down to zero using straight-line method over its remaining 4 years. The book value of the old machine today is $10. It is estimated that the old machine can be sold for $5 in one year (at the end year 1). The maintenance cost per year for the old machine will be $9. Assume that the discount rate is 9% and the tax rate is 30% In answering the question, round to nearest dollar and do not use the dollar ( S ) sign; do not enter decimals. For example if your answer is - $12.534 then enter -13 ; if answer is $23.7459 then enter 24 ; if the answer is - $40 then enter -40 The opportunity cost today (t=0) for the replace 1 -year later decision is Your Answer:

Answer 1

The opportunity cost at time t=0 for deciding whether to replace a factory machine now or one year later requires considering maintenance costs, sale values, depreciation, and discounting future cash flows at the specified rate of 9%. Calculations must include tax implications and compare the net present values of keeping the old machine versus buying the new one.

Step-by-step explanation:

The opportunity cost today (t=0) for the replace 1-year later decision involves analyzing several financial factors, including the initial cost, maintenance expenses, salvage value, depreciation, and the potential sale of the old machine. When comparing the two options, we have to look at the net present value (NPV) of the costs for keeping the old machine for another year versus replacing it with a new one immediately, taking into account the respective maintenance costs, sale values, and depreciation. The tax impacts due to depreciation also need to be accounted for, along with the discounting of future cash flows at the given discount rate of 9%.

In calculating the opportunity cost, the maintenance costs, sale proceeds of the old machine, and the difference in tax savings due to depreciation between the new and old machines have to be considered. The final figure represents the financial impact of postponing the purchase of the new machine by one year, after taking into account all associated costs and benefits discounted back to today's value.