Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less efficient machine presently in use. The cost of the new equipment at time 0, including delivery and installation, is $205,000. If it is purchased, Dungan will incur costs of $5,200 to remove the present equipment and revamp its facilities. This $5,200 is tax deductible at time 0. Depreciation for tax purposes will be allowed as follows: year 1, $42,000; year 2, $72,000; and in each of years 3 through 5, $32,000 per year. The existing equipment has a book and tax value of $102,000 and a remaining useful life of 10 years. However, the existing equipment can be sold for only $42,000 and is being depreciated for book and tax purposes using the straight-line method over its actual life. Management has provided you with the following comparative manufacturing cost data. Annual capacity (units) Annual costs: Labor Depreciation Other (all cash) Total annual costs. Present New Equipment Equipment 402,000 402,000 $ 27,000 $ 32,500 12,000 50,000 16,000 22,000 $ 90,000 $ 61,000 The existing equipment is expected to have a salvage value equal to its removal costs at the end of 10 years. The new equipment is expected to have a salvage value of $62,000 at the end of 10 years, which will be taxable, and no removal costs. No changes in working capital are required with the purchase of the new equipment. The sales force does not expect any changes in the volume of sales over the next 10 years. The company's cost of capital is percent, and its tax rate is 25 percent. Use Exhibit A.8.
Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less efficient machine presently in use. The cost of the new equipment at time 0, including delivery and installation, is $205,000. If it is purchased, Dungan will incur costs of $5,200 to remove the present equipment and revamp its facilities. This $5,200 is tax deductible at time 0. Depreciation for tax purposes will be allowed as follows: year 1, $42,000; year 2, $72,000; and in each of years 3 through 5, $32,000 per year. The existing equipment has a book and tax value of $102,000 and a remaining useful life of 10 years. However, the existing equipment can be sold for only $42,000 and is being depreciated for book and tax purposes using the straight-line method over its actual life. Management has provided you with the following comparative manufacturing cost data. Annual capacity (units) Annual costs: Labor Depreciation Other (all cash) Total annual costs. Present New Equipment Equipment 402,000 402,000 $ 27,000 $ 32,500 12,000 50,000 16,000 22,000 $ 90,000 $ 61,000 The existing equipment is expected to have a salvage value equal to its removal costs at the end of 10 years. The new equipment is expected to have a salvage value of $62,000 at the end of 10 years, which will be taxable, and no removal costs. No changes in working capital are required with the purchase of the new equipment. The sales force does not expect any changes in the volume of sales over the next 10 years. The company's cost of capital is percent, and its tax rate is 25 percent. Use Exhibit A.8.
Chapter10: Cost Recovery On Property: Depreciation, Depletion, And Amortization
Section: Chapter Questions
Problem 44P
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Transcribed Image Text:Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less efficient machine presently in use. The
cost of the new equipment at time 0, including delivery and installation, is $205,000. If it is purchased, Dungan will incur costs of
$5,200 to remove the present equipment and revamp its facilities. This $5,200 is tax deductible at time 0.
Depreciation for tax purposes will be allowed as follows: year 1, $42,000; year 2, $72,000; and in each of years 3 through 5, $32,000
per year. The existing equipment has a book and tax value of $102,000 and a remaining useful life of 10 years. However, the existing
equipment can be sold for only $42,000 and is being depreciated for book and tax purposes using the straight-line method over its
actual life.
Management has provided you with the following comparative manufacturing cost data.
Annual capacity (units)
Annual costs:
Labor
Depreciation
Other (all cash)
Total annual costs.
New
Present
Equipment Equipment
402,000
402,000
$ 32,500
12,000
50,000
$ 90,000
$ 27,000
16,000
22,000
$ 61,000
The existing equipment is expected to have a salvage value equal to its removal costs at the end of 10 years. The new equipment is
expected to have a salvage value of $62,000 at the end of 10 years, which will be taxable, and no removal costs. No changes in
working capital are required with the purchase of the new equipment. The sales force does not expect any changes in the volume of
sales over the next 10 years. The company's cost of capital is 16 percent, and its tax rate is 25 percent. Use Exhibit A.8.
Transcribed Image Text:g.
Net present value
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