Sylvania Manufacturing Company is considering the purchase of new equipment to perform operations currently being performed on

Question:

Sylvania Manufacturing Company is considering the purchase of new equipment to perform operations currently being performed on less efficient equipment. The purchase price is $142,000 delivered and installed. A company engineer estimates that the new equipment will save $29,000 in labor and other direct costs annually. The new equipment will have an estimated life of 10 years and zero at the end of the 10 years. The equipment will be depreciated using a straight-line basis. The existing equipment has a book value of $4,000, has a remaining economic life of five years, and can be disposed of now for $4,000. The company’s average tax rate is 40% (including federal, state, and local taxes), and its after-tax is 12%.
Required:
1. Should the new equipment be purchased?
2. What would the decision be if the were 10%?
3. Interpretive Question: Assuming that the of an investment in new equipment is so small that you are indifferent about whether to make the purchase or keep the old equipment, what other factors would you consider in making the decision?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... 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... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...