Skyworks is considering the purchase of a new manufacturing machine for $90,000. The machine is expected to
Question:
Skyworks is considering the purchase of a new manufacturing machine for $90,000. The machine is expected to increase efficiency, resulting in $45,000 new sales per year. The cost to operate the machine is $9,000. The machine will be depreciated on a straight-line basis to $0 over 10 years. The project will require a net increase of $11,500 in NWC at the beginning of the project and will return half that amount at the project's termination. In addition, Skyworks expects to sell the machine for $9,800 at the end of the project, six years from now. The appropriate discount rate is 15%, and the marginal tax rate is 40%. Consider the acceptance of the new machine for Skyworks, if it is replacing an old machine also with six years of useful life. The old machine generates sales of $9,000 per year and operating costs of $3,800 per year. Additional characteristics for the old machine area as follows:
Purchase price: $55,000
Purchased 4 years ago
Depreciated straight-line over 10 years down to zero
Current disposal value of $27,000
Anticipated selling price in 6 years: $12,500
Should Skyworks purchase the new machine?