Question: The Dauten Toy Corporation currently uses an injection molding machine

The Dauten Toy Corporation currently uses an injection molding machine that was purchased two years ago. This machine is being depreciated on a straight line basis toward a $500 salvage value, and it has six years of remaining life. Its current book value is $2,600, and it can be sold for $3,000 at this time. Thus, the annual depreciation expense is ($2,600 – $500)/6 = $350 per year. Dauten is offered a replacement machine that has a cost of $8,000, an estimated useful life of six years, and an estimated salvage value of $800. This machine falls into the MACRS 5-year class. The replacement machine would permit an output expansion, so sales would rise by $1,000 per year. In addition, the new machine’s much greater efficiency would cause operating expenses to decline by $1,500 per year. The new machine would require that net working capital be increased by $1,500.
Dauten’s marginal tax rate is 40 percent, and its required rate of return is 15 percent. Should the old machine be replaced?


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  • CreatedNovember 24, 2014
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