Should the company keep the old computer

Assignment Help Taxation

Reference no: EM13948247

Madison Company is considering replacing its existing mainframe computer with a new model manufactured by a different company. The existing computer was acquired three years ago, has a remaining life of five years, and will have a salvage value of $10,000. The book value is $200,000. Straight-line depreciation with a half-life convention is being used for tax purposes. The computer's cash operating costs, including software, personnel, and other supplies, total $100,000 per year.

The new computer has an initial cost of $500,000 and will have cash operating costs of $50,000 per year. The new computer will have a life of five years and a salvage value of $100,000 at the end of the fifth year. MACRS depreciation will be used for tax purposes. If the new computer is purchased, the old one will be sold for $50,000. The company needs to decide whether to keep the old computer or buy the new one. The cost of capital is 12 percent. The tax rate is 40 percent.

Required

Compute the NPV of each alternative. Should the company keep the old computer, or buy the new one?

Reference no: EM13948247

Questions Cloud

Compute the payback period for the new equipment : Compute the payback period for the new equipment. Compute the accounting rate of return using both original investment and average investment.

Driving force for the formation of spheroidite : 1. Briefly cite the differences between pearlite, bainite, and spheroidite relative to micro structure and mechanical properties. 2. What is the driving force for the formation of spheroidite?

Costing system in the world in manufacturing firms : Why do you think standard costing is the most widely used costing system in the world in manufacturing firms, even though more sophisticated systems might be available? Discuss.

Transform the 2 relations into domain/key normal form : Transform the following 2 relations into Domain/Key Normal Form (DK/NF). Make and state the appropriate assumptions about functional dependencies and domains.

Should the company keep the old computer : Madison Company is considering replacing its existing mainframe computer with a new model manufactured by a different company. Compute NPV of each alternative. Should the company keep the old computer, or buy the new one?

Calculate the critical radius and the number of stable : 1. (a) Assume for the solidification of nickel (Problem 10.4) that nucleation is homogeneous, and the number of stable nuclei is 106 nuclei per cubic meter. Calculate the critical radius and the number of stable nuclei that exist at the followi..

What are the elements of capital in corporations : What are the elements of capital in corporations? What is the difference between a loan awarded to the company and the company issuing stock to shareholders? what would a debt/equity ratio tell you about a company?

How would this breech affect the valuation of the stock : When a company has a formal Ethics Policy and does something contrary to that policy, what impact might it have on the value of the stock, the employees, investors, regulators, and other stakeholders? How would this breech affect the valuation of the..

Approximate eutectoid temperature of alloy : A steel alloy is known to contain 93.65 wt% Fe, 6.0 wt% Mn, and 0.35 wt% C. (a) What is the approximate eutectoid temperature of this alloy? (b) What is the proeutectoid phase when this alloy is cooled to a temperature just below the eutectoid?

User Account

All Pages