XYZ Enterprise is considering an investment in a new packaging, which could reduce labour costs by 30%. XYZ Enterprise has an annual labour cost of $450,000. The new packaging would cost $725,000 and would replace the old machine that is currently used. The straight line depreciation rate for the new machine is 20% of the purchase price. The new machine would be used for 6 years, with an expected salvage value of $60,000 at the end of its useful life. XYZ Enterprise could obtain a long-term loan at the Canadian Bank and would pay approximately $10,000 interest per year. The old machine was acquired 2 years ago at a cost of $850,000 and is being depreciated over 8 years using the straight-line method. It was expected that after 8 years its salvage value would be zero, but it can be sold now for $212,500. The company ’s tax rate is 35% and its required before-tax return on all investments is 12%. A. Determine the initial investment on the new machine. B. Determine the annual cash flow on year 1.
XYZ Enterprise is considering an investment in a new packaging, which could reduce labour costs by 30%. XYZ Enterprise has an annual labour cost of $450,000. The new packaging would cost $725,000 and would replace the old machine that is currently used. The straight line depreciation rate for the new machine is 20% of the purchase price. The new machine would be used for 6 years, with an expected salvage value of $60,000 at the end of its useful life. XYZ Enterprise could obtain a long-term loan at the Canadian Bank and would pay approximately $10,000 interest per year. The old machine was acquired 2 years ago at a cost of $850,000 and is being
A. Determine the initial investment on the new machine.
B. Determine the annual
Step by step
Solved in 2 steps
