Reference no: EM132564629

Consider an investment of $100,000 in a machine that will replace an old machine that was purchased 5 years ago at a cost of $60,000. Along with that the mechanics - 5 workers - will be laid off and the others have to go through the screening process to make sure they qualify for training. .

The book value of the old asset is $10,000, and it has a market value of $8,000. The machine requires installation before it could be made available for use. The installation costs are $12,000.

The new employees require training in order to use the new machine. The training costs are $7,000. This special investment in the new machine requires that we maintain a minimum of $10,000 in a bank account for 5 years beginning the time of purchase of the new machine.

There is a negotiation with the bank about the type of the interest and its rate on this amount. For the purposes of this question, assume that the simple annual interest might be 1.5 %, to be paid for 5 years.

The useful life of the machine is 5 years with an estimated salvage value of $5,000. The marginal tax rate is 40%.

Required

Question a) Determine the amount that should be used in computation of the present value of tax shield

Question b) Describe how should be treated the training costs and the cash kept aside

Question c) Estimate how is the salvage value treated in the computations

Question d) Make your recommendations on the use of the new machine, prove with the calculation

Question e) Assess the situation with the employees to be laid off