The Baltic Company Is Considering the Purchase of a New

The Baltic Company is considering the purchase of a new machine tool to replace an obsolete one. The machine being used for the operation has a tax book value of $80,000, with an annual depreciation expense of $8,000. It has a salvage value (resale value) of $40,000, is in good working order, and will last, physically, for at least 10 more years. The proposed machine will perform the operation so much more efficiently that Baltic engineers estimate that labor, material, and other direct costs of the operation will be reduced $60,000 a year, if it is installed. The proposed machine costs $240,000 delivered and installed, and its economic life is estimated at 10 years, with zero salvage value. The company expects to earn 14 percent on its investment after taxes (14 percent is the firm's cost of capital). The tax rate is 40 percent, and the firm uses straight-line depreciation. Any gain or loss on the machine is subject to tax at 40 percent.
Should Baltic buy the new machine?