As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $68,000. Its operating costs are $22,400 a year, but at the end of five years, the machine will require a $18,800 overhaul (which is tax deductible). Thereafter, operating costs will be $31,200 until the machine is finally sold in year 10 for $6,800. The older machine could be sold today for $26,200. If it is kept, it will need an immediate $26,000 (tax-deductible) overhaul. Thereafter, operating costs will be $35,000 a year until the machine is finally sold in year 5 for $6,800. Both machines are fully depreciated for tax purposes. The company pays tax at 21%. Cash flows have been forecasted in real terms. The real cost of capital is 14%. a. Calculate the equivalent annual costs for selling the new machine and for selling the old machine. (Do not round intermediate calculations. Enter your answers as a positive value rounded to 2 decimal places.)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines
perform the same function but differ in age. The newer machine could be sold today for $68,000. Its operating costs are $22,400 a
year, but at the end of five years, the machine will require a $18,800 overhaul (which is tax deductible). Thereafter, operating costs will
be $31,200 until the machine is finally sold in year 10 for $6,800.
The older machine could be sold today for $26,200. If it is kept, it will need an immediate $26,000 (tax-deductible) overhaul.
Thereafter, operating costs will be $35,000 a year until the machine is finally sold in year 5 for $6,800.
Both machines are fully depreciated for tax purposes. The company pays tax at 21%. Cash flows have been forecasted in real terms.
The real cost of capital is 14%.
a. Calculate the equivalent annual costs for selling the new machine and for selling the old machine. (Do not round intermediate
calculations. Enter your answers as a positive value rounded to 2 decimal places.)
Sell new machine
Sell old machine
Equivalent Annual
Cost
b. Which machine should United Automation sell?
multiple choice:
a. Sell new machine
b. Sell old machine
Transcribed Image Text:As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $68,000. Its operating costs are $22,400 a year, but at the end of five years, the machine will require a $18,800 overhaul (which is tax deductible). Thereafter, operating costs will be $31,200 until the machine is finally sold in year 10 for $6,800. The older machine could be sold today for $26,200. If it is kept, it will need an immediate $26,000 (tax-deductible) overhaul. Thereafter, operating costs will be $35,000 a year until the machine is finally sold in year 5 for $6,800. Both machines are fully depreciated for tax purposes. The company pays tax at 21%. Cash flows have been forecasted in real terms. The real cost of capital is 14%. a. Calculate the equivalent annual costs for selling the new machine and for selling the old machine. (Do not round intermediate calculations. Enter your answers as a positive value rounded to 2 decimal places.) Sell new machine Sell old machine Equivalent Annual Cost b. Which machine should United Automation sell? multiple choice: a. Sell new machine b. Sell old machine
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