The Boston Toy Corporation (BTC) currently uses an injection moulding machine that was purchased two years ago. This machine is being depreciated on a straight line basis towards a K5000 salvage value, and it has six years of remaining life. Its current book value is K26000, and it can be sold at K30000 at this point. BTC is offered a replacement machine which has a cost of K80000, an estimated useful life of six years, and an estimated salvage value of K8000. The replacement machine would permit an output expansion, so that sales would rise by K10 000 per year, even so, the new machine with much greater efficiency would still cause operating expenses to decline by K15000 per year. The new machine would require that inventories be increased by K20000 and accounts payable would simultaneously increase by K5000. BTC’s effective tax rate is 46% and its cost of capital is 15%. Required By using the Net Present Value Technique, determine whether BTC should replace the old machine.
The Boston Toy Corporation (BTC) currently uses an injection moulding machine that was
purchased two years ago. This machine is being
K5000 salvage value, and it has six years of remaining life. Its current book value is K26000, and
it can be sold at K30000 at this point. BTC is offered a replacement machine which has a cost
of K80000, an estimated useful life of six years, and an estimated salvage value of K8000. The
replacement machine would permit an output expansion, so that sales would rise by K10 000
per year, even so, the new machine with much greater efficiency would still cause operating
expenses to decline by K15000 per year. The new machine would require that inventories be
increased by K20000 and accounts payable would simultaneously increase by K5000. BTC’s
effective tax rate is 46% and its cost of capital is 15%.
Required
By using the
machine.
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