A manufacturer is considering replacing a production machine tool. The new machine, costing $40,000, would have a life of 5 years and no salvage value, but would save the firm $5000 per year in direct labor costs and $2000 per year in indirect labor costs. The existing machine tool was purchased 4 years ago at a cost of $40,000. It will last 5 more years and will have no salvage value. It could be sold now for $15,000 cash. Assume that money is worth 10% and that differences in taxes, insurance, and so forth are negligible. Use an annual cash flow analysis to determine whether the new machine should be purchased.
A manufacturer is considering replacing a production machine tool. The new machine, costing $40,000, would have a life of 5 years and no salvage value, but would save the firm $5000 per year in direct labor costs and $2000 per year in indirect labor costs. The existing machine tool was purchased 4 years ago at a cost of $40,000. It will last 5 more years and will have no salvage value. It could be sold now for $15,000 cash. Assume that money is worth 10% and that differences in taxes, insurance, and so forth are negligible. Use an annual cash flow analysis to determine whether the new machine should be purchased.
Chapter10: Project Cash Flows And Risk
Section: Chapter Questions
Problem 14PROB
Related questions
Question
6-38
A manufacturer is considering replacing a production machine tool. The new machine, costing $40,000, would have a life of 5 years and no salvage value, but would save the firm $5000 per year in direct labor costs and $2000 per year in indirect labor costs. The existing machine tool was purchased 4 years ago at a cost of $40,000. It will last 5 more years and will have no salvage value. It could be sold now for $15,000 cash. Assume that money is worth 10% and that differences in taxes, insurance, and so forth are negligible. Use an annual cash flow analysis to determine whether the new machine should be purchased.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Fundamentals of Financial Management, Concise Edi…
Finance
ISBN:
9781305635937
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Fundamentals of Financial Management, Concise Edi…
Finance
ISBN:
9781305635937
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781285867977
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Fundamentals of Financial Management, Concise Edi…
Finance
ISBN:
9781285065137
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning