The Gilbert Instrument Corporation is considering replacing

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The Gilbert Instrument Corporation is considering replacing

The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to sh… Show more The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to share guitar sides. The steamer, purchased just 2 years ago, is being depreciated on a straight line basis and has 6 years of remaining life. Its current book value is 3,900, and it can be sold on an Internet auction site for $4,500 at this time. Thus, the annual depreciation expense is $4,00/6=650 per year. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life. Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,000 and has an estimated useful life of 6 years with an estimated salvage value of $1,500. This steamer falls into the MACRS 5-yr class, so the applicable depreciation rates are 20.0%, 32.0%, 19.2%,11.52%,11.52% and 5.76%. The new steamer is faster and would allow for an output expansion, so sales would rise by $2,000 per year; even so, the new machine’s much greater efficiency would reduce operating expenses by $1,900 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert’s marginal federal plus state tax rate is 40%, and its WACC is 15%. Should it replace the old steamer? I understand that the new machine should be replaced, the issue I have is the step to get there. I have applied the MACRS and have come to a stop. How do I proceed to get NPV of the new machine and NPV of the old. Do I apply the %40 tax rate on operating costs or what. • Show less

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