The Quick Manufacturing Company, a large profitable corporation, is considering

Question

The Quick Manufacturing Company, a large profitable corporation, is considering the replacement of a production machine tool. A new machine would cost $3700, have a 4-year useful and depreciable life, and have no salvage value. For tax purposes, sum of- years'-digits depreciation would be used. The existing machine tool was purchased 4 years ago at a cost of $4000 and has been depreciated by straight line depreciation assuming an 8-year life and no salvage value. The tool could be sold now to a used equipment dealer for $1000 or be kept in service for another 4 years. It would then have no salvage value. The new machine tool would save about $900 per year in operating costs compared to the existing machine. Assume a 40% combined state and federal tax rate and an interest rate of 10%. Use Annual Equivalent Methods to evaluate if the defender should be replaced or kept. (Mainly the tax tables are important, having issues putting that together)

Explanation / Answer

Step 1: Cash flow computation for mew machine

Step 2: NPV to find whether the project should be accepted or not:

Since the project NPV is negative therefore they should not purchase a new machine.

Particulars 1 2 3 4 save cost 900 900 900 900 Depreciation rate given 925 925 925 925 (on 3700/4) Profit -25 -25 -25 -25 tax40% -10 -10 -10 -10 Profit after tax -15 -15 -15 -15 Cash flow=profit+depreciation 910 910 910 910

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