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?

  • CreatedNovember 24, 2014
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