1 Torreo Coffee Roaster is considering replacing one of its existing machines with a new one. Torreo bought the old one 4 years ago for 2 $87,500. It is being depreciated on a SL basis over a 14-year life. The machine could be sold today 1/1/2000, for $20,000. The new machine costs $95,000. It has a 10-year depreciable life with salvage value of $13,000 in real terms. However, based on the tax law, the asset will be depreciated to 0 over 10 years using a SL method. In 1999 Torreo's current coffee machine accounted for annual revenue of $50,000 and has annual costs of $25,000. The new machine will increase revenue to $65,000 per year (in real terms, that is, in 1999 dollars). The machine will also increase operating costs by $3,000 in real terms. P 34567 8 9 10 11 12 The nominal discount rate is 14% per annum. The corporate tax rate is 40%. The annual anticipated inflation rate is 5%. All cash flows occur at the end of year. Taxes are also paid at the end of year. Should Torreo replace the old machine with the new one?
1 Torreo Coffee Roaster is considering replacing one of its existing machines with a new one. Torreo bought the old one 4 years ago for 2 $87,500. It is being depreciated on a SL basis over a 14-year life. The machine could be sold today 1/1/2000, for $20,000. The new machine costs $95,000. It has a 10-year depreciable life with salvage value of $13,000 in real terms. However, based on the tax law, the asset will be depreciated to 0 over 10 years using a SL method. In 1999 Torreo's current coffee machine accounted for annual revenue of $50,000 and has annual costs of $25,000. The new machine will increase revenue to $65,000 per year (in real terms, that is, in 1999 dollars). The machine will also increase operating costs by $3,000 in real terms. P 34567 8 9 10 11 12 The nominal discount rate is 14% per annum. The corporate tax rate is 40%. The annual anticipated inflation rate is 5%. All cash flows occur at the end of year. Taxes are also paid at the end of year. Should Torreo replace the old machine with the new one?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please help. How can I solve this on excel?
Transcribed Image Text:D31
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16 Torreo coffee roaster's machine replacement
17 Nominal discount rate
18 Inflation Rate
19 Real discount rate
20 Corporate tax
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22 New machine
23 Machine's cost
24 Life span
25 Additional revenue
26 Additional costs
27 Machine's disposal Value
28 Nominal Depreciation
29 Machine real salvage value
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Torreo Coffee Roaster is considering replacing one of its existing machines with a new one. Torreo bought the old one 4 years ago for
$87,500. It is being depreciated on a SL basis over a 14-year life. The machine could be sold today 1/1/2000, for $20,000.
The new machine costs $95,000. It has a 10-year depreciable life with salvage value of $13,000 in real terms. However, based on the tax
law, the asset will be depreciated to 0 over 10 years using a SL method.
In 1999 Torreo's current coffee machine accounted for annual revenue of $50,000 and has annual costs of $25,000. The new machine will
increase revenue to $65,000 per year (in real terms, that is, in 1999 dollars). The machine will also increase operating costs by $3,000 in real
terms.
The nominal discount rate is 14% per annum. The corporate tax rate is 40%. The annual anticipated inflation rate is 5%. All cash flows
occur at the end of year. Taxes are also paid at the end of year. Should Torreo replace the old machine with the new one?
14%
5%
40%
95,000
10
15,000
3,000
0
9,500
13,000
#N/A
Old machine
Machine's cost
Life span
# of years since purchase
Depreciation old machine
B.V. old machine"
Market value old machine
87,500.00
14.00
4.00
6,250.00
H
20,000
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