Blue Ocean Industries has purchased a machine one year ago at the cost of 12000. At...

 

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Blue Ocean Industries has purchased a machine one year ago at the cost of 12000. At the time of purchase the estimated life of the machine was 6 years with no salvage value. The annual cash operating cost is approximately 20,000. A new updated machine has just entered the market with a cost price of <21000. This new machine will perform the same job but with an annual cash operating expenses of 15000 only. The expected Life of the new Machine is 5 years with zero salvage value. The company may sell of the old machine for 10,000 to a scrap dealer. The company follows the straight-Line method of depreciation and the tax rate applicable to the company is 40 percent. Assuming the cost of capital is 8%, you are required to calculate the incremental cash flow after tax. Will it be profitable deal for the company if they opt for replacement of the old machine? Blue Ocean Industries has purchased a machine one year ago at the cost of 12000. At the time of purchase the estimated life of the machine was 6 years with no salvage value. The annual cash operating cost is approximately 20,000. A new updated machine has just entered the market with a cost price of <21000. This new machine will perform the same job but with an annual cash operating expenses of 15000 only. The expected Life of the new Machine is 5 years with zero salvage value. The company may sell of the old machine for 10,000 to a scrap dealer. The company follows the straight-Line method of depreciation and the tax rate applicable to the company is 40 percent. Assuming the cost of capital is 8%, you are required to calculate the incremental cash flow after tax. Will it be profitable deal for the company if they opt for replacement of the old machine?

Answer rating: 100% (QA)

1 Calculate Depreciation for the Old Machine Depreciation per year Cost of machine Salvage value Use... View the full answer