Alvarez Corporation purchased a machine one year ago at a cost of $20,000. At that time, the

Question:

Alvarez purchased a machine one year ago at a cost of $20,000. At that time, the machine was estimated to have a useful life of 7 years and a $1,000 disposal value. A MACRS tax deduction of $4,000 was taken in the year of acquisition. The annual cash operating cost is approximately $40,000.
A new machine that has just come on the market will do the same job but with an annual cash operating cost of only $34,000. This new machine costs $38,000 and has an estimated life of 6 years with no expected . The old machine can be used as a trade-in at an allowance of $18,000. The tax basis of the old machine is $16,000.
The new machine qualifies as 5-year property under MACRS. The company's income tax rate is 40%, and its is 12%.
Required:
Make a recommendation to management based on the capital expenditure proposal's expected internal rate of return. (Use the MACRS depreciation rates provided in Exhibit 22-4.) Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...