Berradi Corp. is considering the purchase of a new stamping machine to manufacture its product. The following information is available:
New Machine
Purchase cost new ........... $85,000
Annual increase in cash revenues ...... 60,000
Annual increase in cash operating costs ... 42,000
Salvage value—10 years from now ..... 5,000
If Berradi purchases the new machine, it will use it for 10 years and then trade it in on another machine. The company computes depreciation on a straight-line basis, for both taxes and financial reporting purposes. Assume Berradi currently has an old stamping machine with a book value of $30,000 that it can currently dispose of for $8,000 if it buys the new machine. Assume Berradi’s cost of capital is 14%, and its tax rate is 30%. Should the new machine be purchased based on the NPV method?

  • CreatedNovember 19, 2014
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