Question

The Tomak Company purchased a machine three years ago for $160,000. It is being depreciated on a straight-line basis over an eight-year life to a zero salvage value. This particular machine was purchased because the firm anticipated a high level of production that never materialized. The firm is considering selling this machine and purchasing a smaller model. It could sell this machine today for its book value of $100,000.

The smaller model costs $50,000, including installation costs, and would be depreciated on a straight-line basis over a five-year life to a zero salvage value. The smaller model will require more labor to operate and management estimates that labor costs will increase by $15,000 per year.

The firm’s income tax rate is 25 percent. Finally, this firm uses a hurdle rate (WACC) of 14 percent to evaluate replacement decisions like this one. Should the firm acquire the smaller machine? Show all work.

Answer #1

A Machine purchased six years ago for Rs 150,000 has
been depreciated to a book value of Rs 90,000. It originally has
projected life of 15 years and zero salvage value. A new machine
will cost Rs 350,000 and result in reduction of operating cost of
Rs 40,000 in first year which will increase @8% for next eight
years. The older machine could be sold for Rs 135,000. The cost of
capital is 10%. The new machine will be depreciated...

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The old machine has been in use for 2 years, and it can be
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3. Woodland Corporation purchased a printing machine three (3)
years ago and is considering replacing it with a new one which is
faster and easier to operate. The old machine has been depreciated
over 3 years using straight line depreciation. Its original
installation cost was $15,000. The old machine has been in use for
2 years, and it can be traded in for $3,500.
The new machine will be purchased $24,000 and it will also be
depreciated over 3 years...

One year ago, your company purchased a machine used in
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available that offers many advantages and you can purchase it for
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over 10 years and has no salvage value. You expect that the new
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expenses other than depreciation) of $45,000 per year for the next
10 years. The current machine...

One year? ago, your company purchased a machine used in
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over ten? years, after which it has no salvage value. You expect
that the new machine will contribute EBITDA? (earnings before?
interest, taxes,? depreciation, and? amortization) of $60,000 per
year for the next ten years. The current machine is...

Woodland Corporation purchased a printing machine three (3)
years ago and is considering replacing it with a new one which is
faster and easier to operate. The old machine has been
depreciated over 3 years using straight line depreciation. Its
original installation cost was $15,000. The old machine
has been in use for 2 years, and it can be traded in for
$3,500. The new machine will be purchased $24,000
and it will also be depreciated over 3 years using the straight...

One year ago, your company purchased a machine used in
manufacturing for $ 110,000. You have learned that a new machine is
available that offers many advantages and you can purchase it for $
170,000 today. It will be depreciated on a straight-line basis
over 10 years and has no salvage value. You expect that the new
machine will produce a gross margin (revenues minus operating
expenses other than depreciation) of $ 60,000 per year for the
next 10 years....

Vector Corporation purchased a machine seven years ago at a cost
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$349,300
$276,400
$337,210
$303,420
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One year? ago, your company purchased a machine used in
manufacturing for $100,000. You have learned that a new machine is
available that offers many advantages and you can purchase it for
$150,000 today. It will be depreciated on a? straight-line basis
over 10 years and has no salvage value. You expect that the new
machine will produce a gross margin? (revenues minus operating
expenses other than? depreciation) of $45,000 per year for the next
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Ella Inc. is considering purchasing a new milling machine. The
new machine costs $298,586, plus installation fees of $11,693 and
will generate revenue of $3,990,261 per year and cost of good sold
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on a straight-line basis over its 5-year life to an estimated
salvage value of 0. Mystic’s marginal tax rate is 0%. Mystic will
require $33,230 in NWC if the machine is purchased. Determine the
annual operating cash...

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