Question

The case – The Image Inc. Image Inc. is a digital camera manufacturer. The manager, Carol, has received an offer for the acquisition of a new piece of equipment that could increase the firm’s performance. Image could produce an additional 52,500 cameras during the first 7 years of operations, and then for the next 3 years the additional production would be 50,500 cameras. Image currently produces 50,000 units of digital cameras with a unit selling price of $349.95. Total costs per unit are $325 excluding depreciation. With the new equipment, Image could decrease its unit cost by $5 for the first 7 years, and then for the next 3 years, costs would return to the initial amount of $325. The manager thinks that he could sell the old piece of equipment for $23,000. The new equipment costs $9,600,000 and will have a salvage value of $37,850 in 10 years. Because it is technologically advanced equipment, installation fees of $147,000 will be incurred and the employees have to be trained.

Required

a. Carol needs your help to decide if she should buy the new equipment and how to manage the situation with training if no special time and fund are set for the training

b. Image has a marginal tax rate of 40% and the after-tax cost of capital of the firm is 15%

c. Straight-line depreciation is used for book purposes

d. If the maximum acceptable payback period for the investment 7 years, should the company replace the equipment now? Explain your rationale and show your calculations

Answer 1