Replace one of its fully depreciated canning machines

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Reference no: EM131016133

Keystone Canning Company must replace one of its fully depreciated canning machines. Two new models are available. Machine A, having a cost of $100,000 an expected life of 3 years and before tax cash flow savings of $55,000 per year and Machine B, having a cost of $200,000, an expected life of 5years, and before tax cash flow savings of $80,000 per year. Machine A fall into the MACRS 3 -year class, while Machine B fall inti the MACRS 5-year class. Both machines will have an expected salvage value equal to their book value at the end of their expected lives. Technological improvements are expected so that any machined purchased after 3 years will provide after tax profit plus depreciation cash flow that are 20 percent higher than present cash flows. However, machinery prices in 3 years are projected to rise 2o percent, offsetting the increased cash flows, after that time, keystone projects that machinery prices and cash flows will be constant. The firm's cost of capital is 15% and its federal plus state tax rate is 40%. If the replacement is to be made, it must be done now. should Keystone replace the old machine with one of the new models? if so, with which alternatives?

Reference no: EM131016133

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