Considering replacement investment

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Reference no: EM13918113

Kandy Corporation is considering a replacement investment. The machine currently in use was originally purchased two years ago for $65,000. Tax-allowable depreciation is $13,000 per year for five years. The current market value of this machine is $23,000. The new machine being considered would cost $140,000, and require $4,000 shipping cost and $2,000 installation costs. The economic life of the machine is estimated as three years. Tax-allowable depreciation is $70,000 per year for the first two years. If the new machine is acquired, the investments in accounts receivable is expected to increase by $9,000, the inventory by $13,000, and accounts payable by $15,000. The before-tax net operating cash flow is estimated as $120,000 per year for the next three years with the old machine and, $143,000 per year for the next three years with the new machine. The expected resale value of the old and new machines in three years’ time would be $4,000 and $6,600, respectively. The corporate tax rate is 30%.

Reference no: EM13918113

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