Reference no: EM13271900
The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to share guitar sides. The steamer, purchased just 2 years ago, is being depreciated on a straight line basis and has 6 years of remaining life. Its current book value is 3,900, and it can be sold on an Internet auction site for $4,500 at this time. Thus, the annual depreciation expense is $4,00/6=650 per year. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life.
Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,000 and has an estimated useful life of 6 years with an estimated salvage value of $1,500. This steamer falls into the MACRS 5-yr class, so the applicable depreciation rates are 20.0%, 32.0%, 19.2%,11.52%,11.52% and 5.76%. The new steamer is faster and would allow for an output expansion, so sales would rise by $2,000 per year; even so, the new machine's much greater efficiency would reduce operating expenses by $1,900 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginal federal plus state tax rate is 40%, and its WACC is 15%. Should it replace the old steamer?
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