A new machine can be purchased for $1,000,000. It will cost $65,000 to ship and

Question

A new machine can be purchased for $1,000,000. It will cost $65,000 to ship and $35,000 to modify the machine. A $30,000 recently completed feasibility study indicated that the fi rm can employ an existing factory owned by the firm, which would have otherwise been sold for $150,000. The firm will borrow $750,000 to fi nance the acquisition. Total interest expense for 5-years is expected to approximate $250,000. What is the investment cost of the machine for capital budgeting purposes?

a. $2,030,000
b. $1,530,000
c. $1,100,000
d. $1,250,000
e. $1,280,000

I come to $1,280,000 by adding the $1,000,000+$65,000+$35,000 = $1,100,000 total cost of machine.
Add to that the $150,000 not received by keeping existing factory (but not sure of this one....) plus $30,000 for feasibility study.

I am lost! This was previously posted and the person answered $1,250,000 but gave no indication of how to arrive there. Please give me all work to see how to do this for future questions. Please be very detailed.

Explanation / Answer

I think you may be going more in-depth in this question than you need to. The 150,000 should not be added because you already have that recorded as an investment somewhere prior in your accounting records, you aren't purchasing it and plus the factory does not go into the cost of the machine. Also the feasibility test is not an investment in the machine.

So the total cost is the cost of the machine plus Freight-in plus modifications
$1,000,000 + $65,000 + $35,000 = 1,100,000 ANSWER = C

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