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Pilot plus Pens is deciding when to replace its old machine. The old machine's current salvage value is $2 million. Its current book value is $1...

Pilot plus Pens is deciding when to replace its old machine. The old machine’s current salvage
value is $2 million. Its current book value is $1 million. If not sold, the old machine will require
maintenance costs of $400,000 at the end of the year for the next five years. Depreciation on
the old machine is $200,000 per year. At the end of five years, the old machine will have
salvage value of $200,000 and a book value of $0. A replacement machine costs $3 million now
and requires maintenance costs of $500,000 at the end of each year during its economic life of
five years. At the end of five years, the new machine will have a salvage value of $500,000. It
will be fully depreciated by the straight-line method. In five years, a replacement machine will
cost $3,500,000. Pilot will need to purchase this machine regardless of what the choice it makes
today. The corporate tax rate is 34% and the appropriate discount rate is 12%. 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?

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529172_FIN.xls

Pilot plus Pens is deciding when to replace its old machine. The old machine’s current salvage
value is $2 million. Its current book value is $1 million. If not sold, the old machine will...

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