You are considering two options for manufacturing a typical product: You continue to use an old machine now in use which was bought 8 years ago at $12,000. It has been fully depreciated but can be sold for $2,000. If kept, it could be used for 3 more years (remaining useful life), at the end of which time it would have no salvage value. The annual operating and maintenance costs amount to $10,000 for the old machine. You purchase a brand new machine at an invoice price of $15,000 to replace the present equipment. Because of the nature of the product manufactured, it also has an expected economic life of 3 years, and will have a salvage value of $3,400 at the end of that time. With the new machine, the expected operating and maintenance costs amount to $3,000 for the first year and $4,000 in each of the next two years. The income tax rate is 35%. Any gains will also be taxed at 35%. The allowed depreciation amounts for the new machine are $2,143 during the first year, $3,673 during the second year, and $1,312 (with the half year convention) during the third year. What is the incremental annual after-tax benefit of replacing the old machine at an interest rate of 15% ? O a. $421 O b. $7,069 O c. $6,648 d. $960
You are considering two options for manufacturing a typical product: You continue to use an old machine now in use which was bought 8 years ago at $12,000. It has been fully depreciated but can be sold for $2,000. If kept, it could be used for 3 more years (remaining useful life), at the end of which time it would have no salvage value. The annual operating and maintenance costs amount to $10,000 for the old machine. You purchase a brand new machine at an invoice price of $15,000 to replace the present equipment. Because of the nature of the product manufactured, it also has an expected economic life of 3 years, and will have a salvage value of $3,400 at the end of that time. With the new machine, the expected operating and maintenance costs amount to $3,000 for the first year and $4,000 in each of the next two years. The income tax rate is 35%. Any gains will also be taxed at 35%. The allowed depreciation amounts for the new machine are $2,143 during the first year, $3,673 during the second year, and $1,312 (with the half year convention) during the third year. What is the incremental annual after-tax benefit of replacing the old machine at an interest rate of 15% ? O a. $421 O b. $7,069 O c. $6,648 d. $960
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 4P: Although the Chen Company’s milling machine is old, it is still in relatively good working order and...
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Transcribed Image Text:You are considering two options for manufacturing a typical product:
.
You continue to use an old machine now in use which was bought 8 years ago at $12,000. It has been fully
depreciated but can be sold for $2,000. If kept, it could be used for 3 more years (remaining useful life), at the
end of which time it would have no salvage value. The annual operating and maintenance costs amount to
$10,000 for the old machine.
You purchase a brand new machine at an invoice price of $15,000 to replace the present equipment. Because
of the nature of the product manufactured, it also has an expected economic life of 3 years, and will have a
salvage value of $3,400 at the end of that time. With the new machine, the expected operating and
maintenance costs amount to $3,000 for the first year and $4,000 in each of the next two years. The income
tax rate is 35%. Any gains will also be taxed at 35%. The allowed depreciation amounts for the new machine
are $2,143 during the first year, $3,673 during the second year, and $1,312 (with the half year convention)
during the third year.
What is the incremental annual after-tax benefit of replacing the old machine at an interest rate of 15% 7
O a. $421
O b. $7,069
O c. $6,648
O d. $960
192
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