11 DeCento's is analyzing two mutually exclusive machines to determine which one it should purchase. Whichevermachine is purchased, it will be replaced at the end of its useful life. The company requires a return of 15percent and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has acost of $386,000, annual operating costs of $29,000, and life of 4 years. Machine B costs $257,000, has annualoperating costs of $19,000, and a life of 3 years. The firm currently pays no taxes. Which machine should bepurchased?

The machine having lower annual cost would be better considering the rate of return required on…

Answered: DeCento's is analyzing two mutually…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

Section: Chapter Questions

Problem 13PROB

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REPLACEMENT ANALYSIS The Dauten Toy Corporation currently uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is 2,100, and it can be sold for 2/500 at this time. Thus, the annual depreciation expense is 2,100/6 = 350 per year. If the old machine not replaced, it can be sold for 500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. This machine falls into the MACRS 5-year class so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by 1,500 per year. The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dauten's marginal federal-plus-state tax rate is 40%, and its WACC is 11%. Should it replace the old machine?
REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings from 24,000 to 46,000 per year. The new machine will cost 80,000, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firms WACC is 10%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one? Explain your answer.
Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase- The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 25%, and its WACC is 11%. Should it replace the old machine?
REPLACEMENT ANALYSIS The Dauten Toy Corporation currently uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is 2,100, and it can be sold for 2,500 at this time. Thus, the annual depreciation expense is 2,100/6 = 350 per year. If the old machine is not replaced, it can be sold for 500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. This machine falls into the MACRS 5-year class so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year. The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 40%, and its WACC is 15%. Should it replace the old machine?

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