The Trax corporation is evaluating a proposal to replace their lathe machines with a newer model that will produce more output per hour at a cheaper variable cost. The old machines have an expected life of five,years with a book value of zero and a resale value of $0. The new machines will costs $2,000,000 and will,require an initial working capital of $100,000 in year 0. The expected increase in output will generate,$300,000 in additional sales. Variable costs will also be reduced by an additional $100,000. The marginal,tax rate for the company is 30%. Use straight line depreciation.,,If the cost of capital is 15%, should they replace the lathe machines with the newer model? Use a five-year,economic life for the machines. What should be the minimum before-tax salvage value in year 5 in order to approve the new machines? If the cost of capital is 15% and there is a five year economic life for the machines, assume the old lathe machines had a book value of $500,000. What,would be the NPV and should the machines be replaced. What should be the salvage value in order to,approve the new machines?
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