A firm is looking to replace its existing manufacturing machine (Machine 1) with a new, more efficient model (Machine 2). Machine 1 can be sold for $1.25 million and has a book value of $975,000. Machine 2 costs $2.5 million delivered, has initial setup cost of $350,000, and would require $200,000 testing expenses. The firm’s tax rate is 32%. Calculate the initial investment needed to replace Machine 1.
What will be an ideal response?
(2.5 Million + 350,000 + 200,000) – (1.25 million – (1.25 million – 975,000) * .32) = $1,888,000
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