Question 07: Virat Kohli Welders is planning to replace an old machine with a new one to improve efficiency in its production process. The machine will increase the efficiency as it is more modern and will result in an incremental savings of $80,000 per year. The old machine was bought 3 years ago at a cost of $270,000. The new machine will cost $420,000. Both machines have useful lives of 6 years. The machines are depreciated to zero for tax purpose over the six-year life using a straight-line depreciation method. The tax rate is 32% and the required rate of return is 13%. The old machine has no salvage value at the end of its life but can be sold now at a cost of $100,000. The new machine will have a salvage value of $80,000 at the end of its life. Should the new machine be purchased?
Question 07: Virat Kohli Welders is planning to replace an old machine with a new one to improve efficiency in its production process. The machine will increase the efficiency as it is more modern and will result in an incremental savings of $80,000 per year. The old machine was bought 3 years ago at a cost of $270,000. The new machine will cost $420,000. Both machines have useful lives of 6 years. The machines are depreciated to zero for tax purpose over the six-year life using a straight-line depreciation method. The tax rate is 32% and the required rate of return is 13%. The old machine has no salvage value at the end of its life but can be sold now at a cost of $100,000. The new machine will have a salvage value of $80,000 at the end of its life. Should the new machine be purchased?
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
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Transcribed Image Text:Question 07: Virat Kohli Welders is planning to replace an old machine with a new one to improve
efficiency in its production process. The machine will increase the efficiency as it is more modern and will
result in an incremental savings of $80,000 per year. The old machine was bought 3 years ago at a cost of
$270,000. The new machine will cost $420,000. Both machines have useful lives of 6 years. The machines
are depreciated to zero for tax purpose over the six-year life using a straight-line depreciation method.
The tax rate is 32% and the required rate of return is 13%. The old machine has no salvage value at the
end of its life but can be sold now at a cost of $100,000. The new machine will have a salvage value of
$80,000 at the end of its life. Should the new machine be purchased?
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