Machine A has been completely overhauled f()r$9000 and is expected to last another 12 years. The $9000

Question:

Machine A has been completely overhauled f()r$9000 and is expected to last another 12 years. The $9000 was treated as an expense for tax purposes last year. Machine A can be sold now for $30,000 net after selling expenses, but will have no salvage value 12 years hence. It was bought new 9 years ago for $54,000 and has been depreciated since then by straight-line depreciation using a 12-year depreciable life.
Because less output is now required, Machine A can now be replaced with a smaller machine: Machine B costs $42,000, has an anticipated life of 12 years, and would reduce operating costs $2500 per year. It would be depreciated by straight-line depreciation with a 12-year depreciable life and no salvage value.
Both the income tax and capital gains tax rates are 40%. Compare the after-tax annual cost of the two machines and decide whether Machine A should be retained or replaced by Machine B. Use a 10% after-tax rate of return in the calculations.
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...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Engineering Economic Analysis

ISBN: 9780195168075

9th Edition

Authors: Donald Newnan, Ted Eschanbach, Jerome Lavelle

Question Posted: