operating income
Emotion Cosmetics is considering whether to replace one of its manufacturing machines with a new one that will increase operating income (excluding depreciation) by $14,300 per year for the next three years. The new machine costs $37,500, and it falls in the MACRS 3-year class. If the new machine is purchased, the old machine, which has a current book value equal to $8,300, will be sold for $5,000. If the old machine is kept, it will continue to be depreciated on a straight-line basis at $2,300 per year, and then it will be sold in three years for $2,000. If the new machine is purchased, Emotion plans to sell it in three years for $6,000. The firm’s marginal tax rate is 40, and its required rate of return is 11 percent. Should the old machine be replaced?
operating income