Question 1 Bunny Businesses makes baskets. Their current machine, Bask-o-matic, has 4 years remaining, is fully depreciated and generates $8M in after-tax free cash flow per year. They can sell the current machine today for $2,000,000. They can replace the machine with the Super-o-matic. The new model costs $16M, has a 4-year life, and generates $14M in after-tax free cash flow per year. The new one cannot be salvaged, but the new depreciation laws allow the cost to be fully written off immediately. The tax rate is 25%; the required return is 9%. Find NPV of the decision. Should they replace the machine? Please explain and show the work.

Question 1 Bunny Businesses makes baskets. Their current machine, Bask-o-matic, has 4 years remaining, is fully depreciated and generates $8M in after-tax free cash flow per year. They can sell the current machine today for $2,000,000. They can replace the machine with the Super-o-matic. The new model costs $16M, has a 4-year life, and generates $14M in after-tax free cash flow per year. The new one cannot be salvaged, but the new depreciation laws allow the cost to be fully written off immediately. The tax rate is 25%; the required return is 9%. Find NPV of the decision. Should they replace the machine? Please explain and show the work.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 9E: Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required:...

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