Deriving net present value of cash flows for decision to dispose of asset Suppose that yesterday Black & Decker Company purchased and installed a made-to-order machine tool for fabricating parts for small appliances. The machine cost $100,000. Today, Square D Company offers a machine tool that will do exactly the same work but costs only $50,000. Assume that the discount rate is 12%, that both machines will last for 5 years, that Black & Decker will depreciate both machines on a straight-line basis with no salvage value for tax purposes, that the income tax rate is and will continue to be 40%, and that Black & Decker earns sufficient income that it can use any loss from disposing of or depreciating the “old” machine to offset other taxable income. How much, at a minimum, must the “old” machine fetch on resale at this time to make purchasing the new machine worthwhile?
Required:
Using future value and present value techniques, including perpetuities to solve a variety of realistic problems, we give no hints as to the specific calculation with the problems.