Question

Incremental Cash Flows The Supreme Shoe Company is considering the purchase of a new, fully automated machine to replace a manually operated one years old, originally had an expected life of 10 years, is being depreciated using the straight-line method from $40,000 down to $0, and can now be sold for $22,000. It takes one person to operate the machine, and he earns $29,000 per year in salary and benefits. The annual costs of maintenance and defects on the old machine are $6,000 and $4,000, respectively. The replacement machine being considered has a purchase price of $75,000 and an expected salvage value of $15,000 at the end of its five-year life. There will also be shipping and installation expenses of $6,000. Because the new machine would work faster, investment in raw materials would increase by a total of $3,000. The company expects that annual maintenance costs on the new machine will be $5,000 while defects will cost $2,000. In order to purchase the new machine, the company would have to take on new debt of $30,000 at 10% interest, resulting in increased interest expense of $3,000 per year. The required rate of return for this project is 15 % and the company's marginal tax rate is 34%. Is this project acceptable? Please construct capital budgeting tables to solve the problems. The machine being replaced, now five

Answer 1

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