Bread Company is planning to purchase a new machine that it will depreciate on a straight-line basis

Question:

Bread Company is planning to purchase a new machine that it will depreciate on a straight-line basis over 10 years. Estimated salvage value = $0. A full year’s depreciation will be taken in the year of acquisition. The machine is expected to produce a net before-tax cash inflow of $6,750 from operations in each of the 10 years. The book rate of return (ARR) is expected to be 10 percent on the initial investment.

The firm’s tax rate is 20 percent.

Required

What is the cost of the new machine?

(CPA Adapted)

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...