Machine.png - Machine Replacing the machine increases EBITDA by 45,000-22,000 = 23,000 Depreciation expenses rises by $17,000-$8,182 =$8,818 Therefore

Machine.png - Machine Replacing the machine increases...

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Unformatted text preview: Machine Replacing the machine increases EBITDA by 45,000 -22,000 = 23,000. Depreciation expenses rises by $17,000-$8,182 =$8,818. Therefore, FCF will increase by (23,000) x (1-0.42) + (0.42) (8,818) =17043.56 in years 1 through 10. In year 0, the initial cost of the machine is $170,000. Because the current machine has a book value of $ 90,000-8,182 (one year of depreciation) = $81,818, selling it for $50,000 generates a capital gain of 50,000-31,818 =-50,000. This loss produces tax savings of 0.42 x 50,000 = $21,000, so that the after-tax proceeds from the sales including this tax savings is $71,000. Thus, the FCF in year 0 from replacement is -170,000 + 71,000 =-$99,000. NPV of replacement =-99,000 + 17,043.56 x (1 / .10)(1-1 / 1.1010) = $5725.30. There is a small profit from replacing the machine....
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  • Spring '12
  • CDG
  • Depreciation, Generally Accepted Accounting Principles, tax savings, year of depreciation

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