Adams Products, Inc., manufactures a product it sells for $ 25. Adams sells all of the 24,000 units per year it is capable of producing at the current time, and a marketing study indicates that it could sell 14,000 more units per year. To increase its capacity, Adams must buy a machine that has the capacity to produce 50,000 units of its product annually. The existing equipment can produce the product at a unit cost of $ 16. Today it has a book value of $ 80,000 and a market value of $ 60,000. The new equipment could produce 50,000 units at a unit cost of $ 12. The new equipment would cost $ 500,000 and would be depreciated uniformly over its five- year life. If the new machine is purchased, fixed operating costs will decrease by $ 20,000 per year. If Adams’s cost of capital is 18 percent and its tax rate is 30 percent, should Adams buy the new machine? Why?
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