Davis Inc. is considering buying a new machine for $5 million. This would replace an old...

Davis Inc. is considering buying a new machine for $5 million. This would replace an old machine that they had bought five years ago for $4 million. The old machine was being depreciated using the straight line method and had a 10 year useful life when it was first purchased. They could not sell it at this point since the old machine technology is obsolete. If Davis decides to buy the new machine and replace the old one, what is the change in capital expenditure for the investment? Note this is just asking what is the initial cash flow for this investment, and they are replacing the old machine with a new one. Davis’ tax rate is 25%.

Expert Solution

Written down value of old machine as per SLM = 4,000,000*5/10 = $2,000,000

Sale value = $0

Loss on Sale = $2,000,000

Tax savings on loss = 2,000,000*25% = $500,000

Hence, capital expenditure for new machine = Purchase cost of new machine - tax savings

= 5,000,000 - 500,000

= $4,500,000

outflow

jeff jeffy answered 2 years ago

Colby Firestone Corporation is considering the purchase of a new machine to replace an old machine....

Colby Firestone Corporation is considering the purchase of a new machine to replace an old machine. The new machine will cost $135,000, has an installation cost of $5000, and will have an expected life of five years with a salvage value of $5,000. The new machine will require $2000 additional working capital. The new machine will result in a cost savings of $20,000 a year. Sales are expected to increase $9,000 per year. The old machine was purchased five years...

Colby Firestone Corporation is considering the purchase of a new machine to replace an old machine....

Colby Firestone Corporation is considering the purchase of a new machine to replace an old machine. The new machine will cost $135,000, has an installation cost of $5000, and will have an expected life of five years with a salvage value of $5,000. The new machine will require $2000 additional working capital. The new machine will result in a cost savings of $20,000 a year. Sales are expected to increase $9,000 per year. The old machine was purchased five years...

Acme Inc. may replace an old machine with a new, more efficient model. The old machine...

Acme Inc. may replace an old machine with a new, more efficient model. The old machine was purchased 5 years ago for $96,000. It is being depreciated over 8 years to zero book value using the straight-line method. Its current book value is $36,000. Its current market value is $30,000. The new machine costs $180,000. It will be depreciated over 6 years to zero book value using the straight-line method. After its useful life of 10 years it is expected...

N0PV Corporation is considering buying a cost saving machine. The new machine costs $1 million and...

N0PV Corporation is considering buying a cost saving machine. The new machine costs $1 million and will last for 10 years. The new machine will be linearly depreciated over 10 years. Assume that they expect the machine to be worthless after 10 years. If they decide to buy the new machine, they will sell the old machine for $200,000. The current book value of the old machine is $250,000. The old machine has a remaining life of 2 years in...

. Topsider Inc. is considering the purchase of a new leather-cutting machine to replace an existing...

. Topsider Inc. is considering the purchase of a new leather-cutting machine to replace an existing machine that has a book value of $3,000 and can be sold for $1,500. The old machine is being depreciated on a straight-line basis, and its estimated salvage value 3 years from now is zero. The new machine will reduce costs (before taxes) by $7,000 per year. The new machine has a 3-year life, it costs $14,000, and it can be sold for an...

Rex Berhad is considering buying a new production machine. The proposed machine would cost the company...

Rex Berhad is considering buying a new production machine. The proposed machine would cost the company RM85,000 and require an installation and modification cost of RM1,500 to be installed properly. In addition, the new machine would require an increase of inventory and account payable of RM 3 000 and RM1 700 respectively. The new machine will be depreciated over its five year life using the simplified straight line method. By using the new machine, sales is expected to increase by...

QUESTION #5: X Company is considering buying a new machine that will cost $150,000 and that...

QUESTION #5: X Company is considering buying a new machine that will cost $150,000 and that will generate annual cash inflows of $31,470 for 6 years. What is the approximate internal rate of return?

A company's management is considering to buying a new machine. A new machine will cost $25,000....

A company's management is considering to buying a new machine. A new machine will cost $25,000. Annual operating and maintenance costs will be $8,000 in the first year, increasing by $400 each year. Assume the machine depreciates by $4,000 per year according to straight-line depreciation. Assume the machine can be re-sold at its book value at any time. a) Owning the proposed new machine for how many years will result in the minimum EAC if the interest rate is 8%?...

The XYZ company is considering the purchase of a new machine to replace an out of...

The XYZ company is considering the purchase of a new machine to replace an out of date machine that has a book value of $18000 and can be sold today for $2,000. The old machine is being depreciated on a straightline basis over 4 more years to a book value of $2000 at the end of the fourth year. The old machine generates annual revenues of $105000 and annual expenses of $75000. This machine requires a fixed investment of $5000...

For a new 5-year project, your company is considering buying new machine costing $1,000,000. The expected...

For a new 5-year project, your company is considering buying new machine costing $1,000,000. The expected salvage of the machine at the end of the project is $80,000. The marketing department has forecasted that the company will be able to sell 120,000 units of new product per year at $15 per unit. The production department has indicated that the variable cost per unit will be $6. The company has forecasted that the incremental fixed costs associated with the project are...

Question

Davis Inc. is considering buying a new machine for $5 million. This would replace an old...

Solutions

Expert Solution

Related Solutions

Colby Firestone Corporation is considering the purchase of a new machine to replace an old machine....

Colby Firestone Corporation is considering the purchase of a new machine to replace an old machine....

Acme Inc. may replace an old machine with a new, more efficient model. The old machine...

N0PV Corporation is considering buying a cost saving machine. The new machine costs $1 million and...

. Topsider Inc. is considering the purchase of a new leather-cutting machine to replace an existing...

Rex Berhad is considering buying a new production machine. The proposed machine would cost the company...

QUESTION #5: X Company is considering buying a new machine that will cost $150,000 and that...

A company's management is considering to buying a new machine. A new machine will cost $25,000....

The XYZ company is considering the purchase of a new machine to replace an out of...

For a new 5-year project, your company is considering buying new machine costing $1,000,000. The expected...