In: Finance
As a result of improvements in product engineering, United
Automation is able to sell one of its two milling machines. Both
machines perform the same function but differ in age. The newer
machine could be sold today for $63,500. Its operating costs are
$21,800 a year, but at the end of five years, the machine will
require a $19,100 overhaul (which is tax deductible). Thereafter,
operating costs will be $30,900 until the machine is finally sold
in year 10 for $6,350.
The older machine could be sold today for $25,900. If it is kept,
it will need an immediate $24,500 (tax-deductible) overhaul.
Thereafter, operating costs will be $34,000 a year until the
machine is finally sold in year 5 for $6,350.
Both machines are fully depreciated for tax purposes. The company
pays tax at 21%. Cash flows have been forecasted in real terms. The
real cost of capital is 13%.
a. Calculate the equivalent annual costs for
selling the new machine and for selling the old machine.
(Do not round intermediate calculations. Enter your answers
as a positive value rounded to 2 decimal places.)
Sell new machine:EAC?
Sell old machine: EAC?
Formulae:
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