XYZ Corporation is considering the purchase of a new milling machine for its RH widgets.The machinery is
Question:
XYZ Corporation is considering the purchase of a new milling machine for its RH widgets. The machinery is expected to cost $350,000 and last a total of 10 years, with a salvage value of $20,000 as scrap metal at the end of its useful life. According to the MACRS classification of machinery, this asset must have a depreciable life of seven (7) years and this is the depreciation method they want to use.
XYZ expects the machine to save the company about $95,000 per year in operating costs over its 10-year expected economic life. The required interest rate (MARR) that ABC wants all investments to earn at a minimum is 10%.
ABC operates in a state that has a 6% state tax rate for a company that earns what ABC earns and ABC is also in the 36% federal income tax rate bracket.
If ABC decided to pay the entire cost of installing the machine with internal funds and not borrow money for the machine, answer the following question:
If ABC leased the machine for $85,000 a year, would it be worth it?
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston