The Midtown Cafeteria employs five people to operate antiquated dishwashing equipment. The cost of wages for these

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The Midtown Cafeteria employs five people to operate antiquated dishwashing equipment. The cost of wages for these people and for maintenance of the equipment is $85,000 per year. Management is considering the purchase of a single, highly automated dishwashing machine that would cost $140,000 and have a useful life of 12 years. This machine would require the services of only three people to operate at a cost of $48,000 per year. A maintenance contract on the machine would cost an additional $2,000 per year. New water jets would be needed on the machine in six years at a total cost of $15,000. The old equipment is fully depreciated and has no resale value. The new machine will have a salvage value of $9,000 at the end of its 12-year useful life. For tax purposes, the company computes depreciation deductions assuming zero salvage value and uses straight-line depreciation. The new dishwashing machine would be depreciated over seven years. Management requires a 14% after-tax return on all equipment purchases. The company’s tax rate is 30%.


Required:

1.         Determine the before-tax annual net cost savings that the new dishwashing machine will provide.

2.         Using the data from (1) above and other data from the exercise, compute the new dishwashing machine’s net present value. Round all dollar amounts to the nearest whole dollar. Would you recommend that it be purchased?

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...
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Managerial Accounting

ISBN: 978-0697789938

13th Edition

Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer

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