Homework Help is Here – Start Your Trial Now!
Business
Accounting
You have been asked by your boss to consider purchasing a new machine to replace an old machine. Either machine will be replaced in 10 years. Evaluate which option is the best for the company after taking into account depreciation, federal and state taxes and inflation. Make sure to justify your answer. The machine will be purchased near the end of the current year. The old machine has no depreciation and no salvage value left. Over the past 10 years, the costs related to the old machine were: 2021 $55,000 2020 $50,000 2019 $45,000 2018 $40,000 2017 $35,000 2016 $30,000 The manager estimates that the costs will keep increasing following a straight line for the upcoming 10 years. The benefits generated by this machine are assumed to be of $100,000 for the next 10 years. The new machine has a first cost of $150,000. The shipping, handling, and installation costs are $20,000. The machine has a 7-year MACRS life. Since the machine is new, the company is not sure about the operating costs of it. Worst case, the machine will have an operating cost of $60,000 in year 1 and it will increase by $2,000 every year. Most likely, operating costs will start at $50,000 and only climb by $1,500 per year. Best case scenario will have operating costs starting at $40,000 and increasing by only $1,000 each year. Benefits from this new machine are expected to be of $120,000 for the first 5 years, and $100,000 for the last 5 years. After 10 years, the machine can be sold for $20,000. Assume the company requires a real 10% after tax rate of return on investments.

You have been asked by your boss to consider purchasing a new machine to replace an old machine. Either machine will be replaced in 10 years. Evaluate which option is the best for the company after taking into account depreciation, federal and state taxes and inflation. Make sure to justify your answer. The machine will be purchased near the end of the current year. The old machine has no depreciation and no salvage value left. Over the past 10 years, the costs related to the old machine were: 2021 $55,000 2020 $50,000 2019 $45,000 2018 $40,000 2017 $35,000 2016 $30,000 The manager estimates that the costs will keep increasing following a straight line for the upcoming 10 years. The benefits generated by this machine are assumed to be of $100,000 for the next 10 years. The new machine has a first cost of $150,000. The shipping, handling, and installation costs are $20,000. The machine has a 7-year MACRS life. Since the machine is new, the company is not sure about the operating costs of it. Worst case, the machine will have an operating cost of $60,000 in year 1 and it will increase by $2,000 every year. Most likely, operating costs will start at $50,000 and only climb by $1,500 per year. Best case scenario will have operating costs starting at $40,000 and increasing by only $1,000 each year. Benefits from this new machine are expected to be of $120,000 for the first 5 years, and $100,000 for the last 5 years. After 10 years, the machine can be sold for $20,000. Assume the company requires a real 10% after tax rate of return on investments.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
See similar textbooks
icon
Related questions
Question
please answer within 30 minutes.
You have been asked by your boss to consider purchasing a new machine to replace an old machine. Either machine will be replaced in 10 years. Evaluate which option is the best for the company after taking into account depreciation, federal and state taxes and inflation. Make sure to justify your answer. The machine will be purchased near the end of the current year. The old machine has no depreciation and no salvage value left. Over the past 10 years, the costs related to the old machine were: 2021 $55,000 2020 $50,000 2019 $45,000 2018 $40,000 2017 $35,000 2016 $30,000 The manager estimates that the costs will keep increasing following a straight line for the upcoming 10 years. The benefits generated by this machine are assumed to be of $100,000 for the next 10 years. The new machine has a first cost of $150,000. The shipping, handling, and installation costs are $20,000. The machine has a 7-year MACRS life. Since the machine is new, the company is not sure about the operating costs of it. Worst case, the machine will have an operating cost of $60,000 in year 1 and it will increase by $2,000 every year. Most likely, operating costs will start at $50,000 and only climb by $1,500 per year. Best case scenario will have operating costs starting at $40,000 and increasing by only $1,000 each year. Benefits from this new machine are expected to be of $120,000 for the first 5 years, and $100,000 for the last 5 years. After 10 years, the machine can be sold for $20,000. Assume the company requires a real 10% after tax rate of return on investments.
Transcribed Image Text:You have been asked by your boss to consider purchasing a new machine to replace an old machine. Either machine will be replaced in 10 years. Evaluate which option is the best for the company after taking into account depreciation, federal and state taxes and inflation. Make sure to justify your answer. The machine will be purchased near the end of the current year. The old machine has no depreciation and no salvage value left. Over the past 10 years, the costs related to the old machine were: 2021 $55,000 2020 $50,000 2019 $45,000 2018 $40,000 2017 $35,000 2016 $30,000 The manager estimates that the costs will keep increasing following a straight line for the upcoming 10 years. The benefits generated by this machine are assumed to be of $100,000 for the next 10 years. The new machine has a first cost of $150,000. The shipping, handling, and installation costs are $20,000. The machine has a 7-year MACRS life. Since the machine is new, the company is not sure about the operating costs of it. Worst case, the machine will have an operating cost of $60,000 in year 1 and it will increase by $2,000 every year. Most likely, operating costs will start at $50,000 and only climb by $1,500 per year. Best case scenario will have operating costs starting at $40,000 and increasing by only $1,000 each year. Benefits from this new machine are expected to be of $120,000 for the first 5 years, and $100,000 for the last 5 years. After 10 years, the machine can be sold for $20,000. Assume the company requires a real 10% after tax rate of return on investments.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Avoiding and Correcting Credit Mistakes
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS