Wrl company operates a snack food center at the hartsfield

Assignment Help Accounting Basics

Reference no: EM13599926

WRL Company operates a snack food center at the Hartsfield Airport. On January 1, 2003, WRL purchased a special cookie-cutting machine, which has been used for three years. It is January 1, 2006, and WRL is considering whether it should purchase a new, more-efficient cookie-cutting machine. WRL has two options:

(1) continue using the old machine or

(2) sell the old machine and purchase a new machine.

The seller of the new machine is not offering a trade-in. The following information has been obtained:

Item Old Machine New Machine
Initial purchase cost of machines $ 80,000 $ 120,000
Useful life from acquisition date ( years) 7 4
Terminal disposal value at the end of useful life on
Dec. 31, 2009, assumed for depreciation purposes $ 10,000 $ 20,000
Expected annual cash operating costs:
Variable cost per cookie $ 0.20 $ 0.14
Total fixed costs $ 15,000 $ 14,000
Estimated disposal value of machines:
January 1, 2006 $ 40,000 $120,000
December 31, 2009 $ 7,000 $ 20,000
Expected number of cookies made and sold each year 300,000 300,000

WRL is subject to a 40% income tax rate. The straight-line depreciation method is used for tax purposes. Assume that any gain or loss on the sale of machines is treated as an ordinary tax item and will affect the taxes paid by WRL in the year in which it occurs. WRL's after- tax required rate of return is 16%. Assume all cash flows occur at year-end except for initial investment amounts.

Required:

1. You have been asked whether WRL should buy the new machine. To help in your analysis, calculate the following:

a. One- time after- tax cash effect of disposing of the old machine.

b. Annual recurring after- tax cash operating savings from using the new machine (variable and fixed).

c. Cash tax savings due to differences in annual depreciation of the old machine and the new machine.

d. Difference in after- tax cash flow from terminal disposal of new machine and old machine.

2. Use your calculations in requirement 1 and the net present value method to determine whether WRL should use the old machine or acquire the new machine.

3. How much more or less would the recurring after- tax cash operating savings of the new machine need to be for WRL to earn exactly the 16% after- tax required rate of return? Assume that all other data about the investment do not change.

Reference no: EM13599926

Questions Cloud

At the end of the quarter actual manufacturing overhead : factory uses job costing to cost its products. in its first quarter the company incurred the following material and

During its long tenure the committee on accounting : during its long tenure the committee on accounting procedures capproduece a total of 51 accounting research bulletins

A new bank has vault cash of 1 million and 5 million in : a new bank has vault cash of 1 million and 5 million in deposits held at it federal reserve district bank. a. if the

Pib partnership is owned 20 by shore 40 by steve and 40 by : pib partnership is owned 20 by shore 40 by steve and 40 by thann. burnham inc. is owned 70 by pib partnership 10 by

Wrl company operates a snack food center at the hartsfield : wrl company operates a snack food center at the hartsfield airport. on january 1 2003 wrl purchased a special

Shipping contracts changed 2 months ago from fob shipping : norwel company makes miniature circuit boards that are components of wireless phones and personalorganizers. the

On january 1 2006 payton co sold equipment to its : on january 1 2006 payton co. sold equipment to its subsidiary starker corp. for 115000. the equipment had cost 125000

X-beams inc owned 70 of the voting common stock of kent : x-beams inc. owned 70 of the voting common stock of kent corp. during 2006 kent made several sales of inventory to

To evaluate the financial operation and health of a : to evaluate the financial operation and health of a business ratio analysis is used. 1 provide the formula for the

User Account

All Pages