Should the firm purchase the new machine

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The Boyd Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of five years. The firm does not expect to realize any return from scrapping the old machine in five years, but it can be sold today to another firm in the industry for $265,000. The old machine is being depreciated toward a zero salvage value, or by $120,000 per year, using the straight line method. The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of five years, and an estimated market value of $145,000 at the end of five years. (See Table 10A.2 at the end of Chapter 10 for MACRS recovery allowance percentages.) The machine is expected to economize on electric power usage, labor, and repair costs, which will save Boyd $230,000 each year. In addition, the new machine is expected to reduce the number of defective bottles, which will save an additional $25,000 annually. The company’s marginal tax rate is 40 percent and it has a 12 percent required rate of return. Should the firm purchase the new machine? Support your answer.

Reference no: EM131333503

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