The owner of Black Hills Cafe is considering the purchase of a new semi-automatic coffee-making. The machine

Question:

The owner of Black Hills Cafe is considering the purchase of a new semi-automatic coffee-making. The machine will cost $75 000 and last 10 years. The machine is expected to have no salvage value at the end of its useful life. The owner estimates that the new machine will generate $12 000 in after-tax savings each year during its life (including the tax effect of depreciation). The depreciation charge is the same for accounting and tax purposes.

Required:

Calculate the profitability index for the proposed vending machine, assuming the after-tax required rate of return of:

(a) 6 percent.

(b) 8 percent.

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...