The Slicehookshank Company's golf ball machine was purchased 5 years ago for $550,000. It had an expected life of 10 years when purchased and was being depreciated at $55,000 per year. It is estimated that the salvage value of the machine is $200,000 after its useful life. A new high- efficiency, digitally controlled machine can be purchased for $1,000,000. It will cost $200,000 to ship and install the new machine. During its 5 - year life it will reduce operating expenses by $300,000 per year but have no impact on sales. It is estimated that the new machine will have no salvage value and it will be depreciated using the 3-year MACRS class of 33.33%, 44.45 %, 14.81% and 7.41 %. The old machine can be sold today for $350,000. The applicable tax rate is 25% and the WACC is 15 %. Should Slicehookshank purchase the new machine or keep operating with the old one?
The Slicehookshank Company's golf ball machine was purchased 5 years ago for $550,000. It had an expected life of 10 years when purchased and was being depreciated at $55,000 per year. It is estimated that the salvage value of the machine is $200,000 after its useful life. A new high- efficiency, digitally controlled machine can be purchased for $1,000,000. It will cost $200,000 to ship and install the new machine. During its 5 - year life it will reduce operating expenses by $300,000 per year but have no impact on sales. It is estimated that the new machine will have no salvage value and it will be depreciated using the 3-year MACRS class of 33.33%, 44.45 %, 14.81% and 7.41 %. The old machine can be sold today for $350,000. The applicable tax rate is 25% and the WACC is 15 %. Should Slicehookshank purchase the new machine or keep operating with the old one?
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:The Slicehookshank Company's golf ball machine was purchased 5 years ago
for $550,000. It had an expected life of 10 years when purchased and was
being depreciated at $55,000 per year. It is estimated that the salvage
value of the machine is $200,000 after its useful life. A new high-
efficiency, digitally controlled machine can be purchased for $1,000,000.
It will cost $200,000 to ship and install the new machine. During its 5 -
year life it will reduce operating expenses by $300,000 per year but have no
impact on sales. It is estimated that the new machine will have no salvage
value and it will be depreciated using the 3-year MACRS class of 33.33%,
44.45 %, 14.81% and 7.41 %. The old machine can be sold today for $350,000.
The applicable tax rate is 25% and the WACC is 15 %.
Should Slicehookshank purchase the new machine or keep operating with the
old one?
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