Question

- The Muar Toy Corporation currently uses an injection-molding machine that was purchased 2 years ago. This machine is being depreciated on a straight line basis toward a $ 500 salvage value, and it has 6 years of remaining life, Its current book value is $ 2.600 and it can be sold for $ 3,000 at this time.

Thus, the annual depreciation expense is ($ 2,600 - $ 500) / 6 = $ 350 per year. The corporation is offered a replacement machine, which has a cost of $ 8,000, an estimated useful life of 6 years, and an estimated salvage value of $ 800. This machine falls into the ACRS 5-year class. The replacement machine would permit an output expansion, so sales would rise by $ 1,000 per year: even so, the new machine's much greater efficiency would still cause operating expenses to decline by $ 1,500 per year the new machine would require the inventories are increased by $ 2,000, but accounts payable would simultaneously increase by $ 500. The company marginal tax rate is 40 percent, and its cost of capital is 15 percent. Should it replace the old machine? ACRS: (Ownership 6 years), (3-year class of investment: 33%, 45%, 15% and 7%), (5-year class of investment: 20%, 32%, 19%, 12%, 11 % and 6%).

Answer 1