The Quick Manufacturing Company, a large profitable corporation, is considering the replacement of a production machine tool.

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The Quick Manufacturing Company, a large profitable corporation, is considering the replacement of a production machine tool. A new machine would cost $3700, have a 4-year useful and depreciable life, and have no salvage value. For tax. purposes, sum of- years'-digits depreciation would be used. The existing machine tool was purchased 4 years ago at a cost of $4000 and has been depreciated by straight line depreciation assuming an 8-year life and no salvage value. The tool could be sold now to a used equipment dealer for $1000 or be kept in service for another 4 years. It would then have no salvage value. The new machine tool would save about $900 per year in operating costs compared to the existing machine. Assume a 40% combined state and federal tax rate?
(a) Compute the before-tax rate of return on the replacement proposal of installing the new machine rather than keeping the existing machine.
(b) Compute the after-tax rate of return on this replacement proposal.
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...
Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the...
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Engineering Economic Analysis

ISBN: 9780195168075

9th Edition

Authors: Donald Newnan, Ted Eschanbach, Jerome Lavelle

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