Standard Manufacturing Inc. purchased a piece of equipment two years ago for Tk. 250,000. It is...
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Standard Manufacturing Inc. purchased a piece of equipment two years ago for Tk. 250,000. It is to be 10 depreciated over its original life of 8 years using straight-line method and at the end of its life, the salvage value of the equipment is estimated at Tk. 20,000. A new piece of equipment can be purchased for Tk. 360,000 that has a tax life of five years and would be depreciated as per MACRS tax rule. The new machine, if purchased, would cost 5% and 10% of purchase price for proper installation and trial production cost respectively. The new equipment has a salvage value, which is 27% of its depreciable basis. If the new machine is purchased the old one will be sold to another company for Tk. 150,000. Assume that the old and new equipment would provide the following operating gain (loss) over the next six years Year New Equipment Old Equipment 1 100,000 36,000 2 3 4 86,000 80,000 72,000 26,000 19,000 18,000 5 6 43,000 62,000 16,000 (9,000) The new equipment would require that accounts receivables and inventories be increased by 10,000 and 8000 respectively, but accounts payable would simultaneously be increased by Tk. 5000. Installation of the new, machine would also require additional 0.50 acre of land and the company would use its own tract of land that could otherwise be sold at Tk 75,000. After six years of operation of the new machine, the piece of land on which it was installed would have a market value of Tk 100,000. Use of the new equipment would result in quality enhancement of the product that the company sells in the market. The upgraded quality of the product would cause the sales of another brand of the same company to fall by Tk. 80,000 canibalization The firm has 40% tax rate and bears average risk. So the required rate of return appropriate for the project is 10%. Should the new equipment be purchased to replace the old one? Standard Manufacturing Inc. purchased a piece of equipment two years ago for Tk. 250,000. It is to be 10 depreciated over its original life of 8 years using straight-line method and at the end of its life, the salvage value of the equipment is estimated at Tk. 20,000. A new piece of equipment can be purchased for Tk. 360,000 that has a tax life of five years and would be depreciated as per MACRS tax rule. The new machine, if purchased, would cost 5% and 10% of purchase price for proper installation and trial production cost respectively. The new equipment has a salvage value, which is 27% of its depreciable basis. If the new machine is purchased the old one will be sold to another company for Tk. 150,000. Assume that the old and new equipment would provide the following operating gain (loss) over the next six years Year New Equipment Old Equipment 1 100,000 36,000 2 3 4 86,000 80,000 72,000 26,000 19,000 18,000 5 6 43,000 62,000 16,000 (9,000) The new equipment would require that accounts receivables and inventories be increased by 10,000 and 8000 respectively, but accounts payable would simultaneously be increased by Tk. 5000. Installation of the new, machine would also require additional 0.50 acre of land and the company would use its own tract of land that could otherwise be sold at Tk 75,000. After six years of operation of the new machine, the piece of land on which it was installed would have a market value of Tk 100,000. Use of the new equipment would result in quality enhancement of the product that the company sells in the market. The upgraded quality of the product would cause the sales of another brand of the same company to fall by Tk. 80,000 canibalization The firm has 40% tax rate and bears average risk. So the required rate of return appropriate for the project is 10%. Should the new equipment be purchased to replace the old one?
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Calculate remaining book value of old equipment Original cost Tk 250000 Depreciation each year CostU... View the full answer
Related Book For
Intermediate Accounting Volume 1
ISBN: 978-1119496496
12th Canadian edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy
Posted Date:
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