Purchase of a new machine to replace an out of date machine

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Reference no: EM132398285

The ABD company is considering the purchase of a new machine to replace an out of date machine that has a book value of $18000 and can be sold today for $2,000. The old machine is being depreciated on a straightline basis over 4 more years to a book value of $2000 at the end of the fourth year. The old machine generates annual revenues of $105000 and annual expenses of $75000. This machine requires a fixed investment of $5000 in net working capital.

The proposed new machine has an installed and depreciable cost of $125,000 and will be depreciated by 3-yr. ACRS class rules using these percentages: .3334, .4444, .1481, .0741 over the Four years that the machine will be used. The new machine will require a fixed investment of $10500 in net working capital. It is expected to generate annual revenue of $180,000 and annual cash expenses of $90000.

If the old machine is used for four more years, it is expected to have only a cash market value of $1500 at the end of the fourth year. The new machine expected to have a cash market value of $42,500. Working capital investments for both machines consists primarily of tools and spare parts that can be sold for full value at any time the machines are retired.

The marginal tax rate is 40%. The appropriate discount rate is 12.5%.

Reference no: EM132398285

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