The Gilbert Instrument Corporation is considering replacing the wood steamer it cur-rently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $650 for 5 years and $325 for the sixth year. Its current book value is $3,575, and it can be sold on an Internet auction site for $4,150 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life. Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,000 and has an estimated useful life of 6 years with an estimated salvage value of $1,500. This steamer falls into the MACRS 5-year class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine’s much greater efficiency would reduce operating expenses by $1,900 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but ac-counts payable would simultaneously increase by $700. Gilbert’s marginal federal-plus-state tax rate is 25%, and the project cost of capital is 15%. Should it replace the old steamer?
The Gilbert Instrument Corporation is considering replacing the wood steamer it cur-rently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have
costs $12,000 and has an estimated useful life of 6 years with an estimated salvage value of $1,500. This steamer falls into the MACRS 5-year class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine’s much greater efficiency would reduce operating expenses by $1,900 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but ac-counts payable would simultaneously increase by $700. Gilbert’s marginal federal-plus-state tax rate is 25%, and the project cost of capital is 15%. Should it replace the old steamer?
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