• Option 1: Continue to use the old machine: A machine now in use, whichwas bought five years ago for $5.000, has been fully depreciated. It can besold for $3,000, but could be used for three more years (remaining usefullife), al the end of which time it would have no salvage value. The annualoperating and maintenance costs for the old machine amount to $12,00.• Option 2: Replace the old machine: A new machine can be purchased atan invoice price of $ 15.000 to replace the present equipment. Because ofthe nature of the manufactured product, the new machine has an expectedeconomic life of three years, and it will have no salvage value at the end orthat time. The new machine's expected operating and maintenance costsamount to $2,500 for the first year and $3,500 for each of the next two years. The income tax rate is 35%. Any gains will also be taxed at 35%. The allowed depreciation amounts for the new machine are $1,500 during the first year. and $2.600 per year for the next two years. The firm's interest rate is 12%. If you decide to retain the old machine for now, what will be the opportunity cost?(a) $2,500 (b) $3,000 (c) $ 1,650 (d) $1,500
• Option 1: Continue to use the old machine: A machine now in use, which
was bought five years ago for $5.000, has been fully
sold for $3,000, but could be used for three more years (remaining useful
life), al the end of which time it would have no salvage value. The annual
operating and maintenance costs for the old machine amount to $12,00.
• Option 2: Replace the old machine: A new machine can be purchased at
an invoice price of $ 15.000 to replace the present equipment. Because of
the nature of the manufactured product, the new machine has an expected
economic life of three years, and it will have no salvage value at the end or
that time. The new machine's expected operating and maintenance costs
amount to $2,500 for the first year and $3,500 for each of the next two years. The income tax rate is 35%. Any gains will also be taxed at 35%. The allowed depreciation amounts for the new machine are $1,500 during the first year. and $2.600 per year for the next two years. The firm's interest rate is 12%.
If you decide to retain the old machine for now, what will be the
(a) $2,500 (b) $3,000 (c) $ 1,650 (d) $1,500
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