Need solution Bach Company paid $120,000 to purchase a machine onJanuary 1, 2012. In 2014, a technological breakthrough resultedin the development of a new machine that costs $150,000. Theold machine costs $50,000 per year to operate, but the newmachine could be operated for only $18,000 per year. The newmachine, which will be available for delivery on January 1, 2015,has an expected useful life of four years. The old machine ismore durable and is expected to have a remaining useful lifeof four years. The current market value of the old machine is$40,000. The expected salvage value of both machines is zero.Required:Calculate the total avoidable costs in keeping the oldmachine and buying a new machine.

Step 1: Define Avoidable Cost:Unavoidable cost can be defined as a cost that can be avoided by a…

Answered: Bach Company paid $120,000 to purchase…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 17P

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As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $50,000. Its operating costs are $20,000 a year, but in five years the machine will require a $20,000 overhaul. Thereafter, operating costs will be $30,000 until the machine is finally sold in year 10 for $5,000. The older machine could be sold today for $25,000. If it is kept, it will need an immediate $20,000 overhaul. Thereafter, operating costs will be $30,000 a year until the machine is finally sold in year 5 for $5,000. Both machines are fully depreciated for tax purposes. The company pays tax at 35%. Cash flows have been forecasted in real terms. The real cost of capital is 12%. Which machine should United Automation sell? Explain the assumptions underlying your answer.
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