The Dauten Toy Corporation currently uses an injection molding machine that was purchased prior to the new tax legislation. This machine is being
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. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would rise by $800 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,000 per year. The new machine would require that inventories be increased by $2,500, but accounts payable would simultaneously increase by $500. Dauten's marginal federal-plus-state tax rate is 25%, and its WACC is 11%.
What is the
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Should the company replace the old machine?
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