Canada Duck sells a variety of winter coats to individual and retail stores. The company  expects to retire all its manufacturing equipment in the new year. At that point, Canada  Duck is considering three options: Option 1) It rents its manufacturing equipment at an annual cost of $125,000 per year.  Maintenance of equipment costs $8,500 per year. The company pays rent and  maintenance at the beginning of each year. Option 2) It rents state-of-the-art manufacturing equipment at an annual cost of $200,000  per year. The company will save $22,000 annually on manufacturing costs. Maintenance  of equipment costs $5,000 per year. All costs and savings are incurred at year-end. Option 3) It purchases new equipment for $1,500,000. The equipment is expected to  have a life span of 10 years with no salvage value at the end. Canada Duck uses the  sum-of-years’-digits depreciation method. The equipment will require maintenance of  $1,500 per year. The company will save $46,000 annually on manufacturing costs.  Depreciation, maintenance, and manufacturing savings are incurred at year-end. Suppose the discount rate is 3%, the company’s tax rate is 24%, which is a better option  for Canada Duck

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Canada Duck sells a variety of winter coats to individual and retail stores. The company 
expects to retire all its manufacturing equipment in the new year. At that point, Canada 
Duck is considering three options:
Option 1) It rents its manufacturing equipment at an annual cost of $125,000 per year. 
Maintenance of equipment costs $8,500 per year. The company pays rent and 
maintenance at the beginning of each year.
Option 2) It rents state-of-the-art manufacturing equipment at an annual cost of $200,000 
per year. The company will save $22,000 annually on manufacturing costs. Maintenance 
of equipment costs $5,000 per year. All costs and savings are incurred at year-end.
Option 3) It purchases new equipment for $1,500,000. The equipment is expected to 
have a life span of 10 years with no salvage value at the end. Canada Duck uses the 
sum-of-years’-digits depreciation method. The equipment will require maintenance of 
$1,500 per year. The company will save $46,000 annually on manufacturing costs. 
Depreciation, maintenance, and manufacturing savings are incurred at year-end.
Suppose the discount rate is 3%, the company’s tax rate is 24%, which is a better option 
for Canada Duck

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