Using excel functions Canada Duck sells a variety of winter coats to individual and retail stores. The company expects to retire all its manufacturing equipment in the new year. At that point, Canada Duck is considering three options: Option 1) It rents its manufacturing equipment at an annual cost of $365,500 per year, paid at the beginning of the year. There are no maintenance costs. Option 2) It rents state-of-the-art manufacturing equipment at an annual cost of $695,000 per year, paid mid- year. The company will save $310,000 annually on manufacturing costs. There are no maintenance costs. Option 3) It purchases new equipment for $2,500,000. The equipment will require maintenance of $150,000 per year and is expected to have a life span of 15 years with no salvage value at the end. Canada Duck uses the straight-line depreciation method. Suppose the discount rate is 3.7%, the company’s tax rate is 25%, and all maintenance costs are paid at year's end, which is a better option for Canada Duck?
Using excel functions Canada Duck sells a variety of winter coats to individual and retail stores. The company
expects to retire all its manufacturing equipment in the new year. At that point, Canada
Duck is considering three options:
Option 1) It rents its manufacturing equipment at an annual cost of $365,500 per year,
paid at the beginning of the year. There are no maintenance costs.
Option 2) It rents state-of-the-art manufacturing equipment at an annual cost of $695,000
per year, paid mid- year. The company will save $310,000 annually on manufacturing
costs. There are no maintenance costs.
Option 3) It purchases new equipment for $2,500,000. The equipment will require
maintenance of $150,000 per year and is expected to have a life span of 15 years with no
salvage value at the end. Canada Duck uses the straight-line depreciation method.
Suppose the discount rate is 3.7%, the company’s tax rate is 25%, and all maintenance
costs are paid at year's end, which is a better option for Canada Duck?
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