Storey, Inc. is considering the purchase and installation of new manufacturing equipment to replace its old,...

  

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Storey, Inc. is considering the purchase and installation of new manufacturing equipment to replace its old, worn-out equipment. The following information is available. 1. Useful life of the new equipment, 8 years. 2. Cost of new equipment, $3,600,000. 3. Cost to set up new equipment, $200,000. 4. Estimated selling price of the new equipment at the end of its useful life, $60,000. 5. Annual operating savings, $700,000. 6. Working capital investment required, $600,000. This amount will be released at the end of the project. 7. Upgrade expense to the equipment at the end of the 5th year, $200,000. 8. Cost of the old equipment is $900,000 while the accumulated depreciation is $500,000 and the estimated market value is $300,000. 9. Tax rate is 25%. Cost of capital is 10%. Required: Should Storey invest in the new equipment? Storey, Inc. is considering the purchase and installation of new manufacturing equipment to replace its old, worn-out equipment. The following information is available. 1. Useful life of the new equipment, 8 years. 2. Cost of new equipment, $3,600,000. 3. Cost to set up new equipment, $200,000. 4. Estimated selling price of the new equipment at the end of its useful life, $60,000. 5. Annual operating savings, $700,000. 6. Working capital investment required, $600,000. This amount will be released at the end of the project. 7. Upgrade expense to the equipment at the end of the 5th year, $200,000. 8. Cost of the old equipment is $900,000 while the accumulated depreciation is $500,000 and the estimated market value is $300,000. 9. Tax rate is 25%. Cost of capital is 10%. Required: Should Storey invest in the new equipment?

Answer rating: 100% (QA)

Year Savings in cost Tax outflow on savings 25 Tax inflow in depreciation Cash flow on assets Working capital Net Cash flow Present value 10 Present v... View the full answer