12-10 REPLACEMENT ANALYSIS The Dauten Toy Corporation currently uses an injection mold- ing machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,100, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,100/6 = $350 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $8,000, an estimated useful life of 6 years, and an estimated salvage value of $800. This machine falls into the MACRS 5-year class so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine would permit an output expansion, so sales would rise by $1,000 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $500. Dauten's marginal federal-plus-state tax rate is 40%, and its WACC is 11%. Should it renlace the old machine?
12-10 REPLACEMENT ANALYSIS The Dauten Toy Corporation currently uses an injection mold- ing machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,100, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,100/6 = $350 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $8,000, an estimated useful life of 6 years, and an estimated salvage value of $800. This machine falls into the MACRS 5-year class so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine would permit an output expansion, so sales would rise by $1,000 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $500. Dauten's marginal federal-plus-state tax rate is 40%, and its WACC is 11%. Should it renlace the old machine?
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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Prob5
12-10
REPLACEMENT ANALYSIS
The Dauten Toy Corporation currently uses an injection mold-
ing machine that was purchased 2 years ago. This machine is being depreciated on a
straight-line basis, and it has 6 years of remaining life. Its current book value is $2,100, and
it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,100/6
$350 per year. If the old machine is not replaced, it can be sold for $500 at the end of its
useful life.
Dauten is offered a replacement machine which has a cost of $8,000, an estimated
useful life of 6 years, and an estimated salvage value of $800. This machine falls into the
MACRS 5-year class so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%,
and 6%. The replacement machine would permit an output expansion, so sales would
rise by $1,000 per year; even so, the new machine's much greater efficiency would cause
operating expenses to decline by $1,500 per year. The new machine would require that
inventories be increased by $2,000, but accounts payable would simultaneously increase
by $500. Dauten's marginal federal-plus-state tax rate is 40%, and its WACC is 11%. Should
it replace the old machine?
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