Question

ACCOUNTING

Let say that ASSAL   Company is considering the purchase of a newer, more efficient yogurt-making machine. If purchased, it would require the new machine on January 2, year 1. ASSAL   expects to sell 600,000 gallons of milk in each of the next five years at a $2 per gallon selling price.

ASSAL   has two options:

(1) continue to operate the old machine purchased four years ago or

(2) sell it and purchase the new machine.

The following information has been prepared to help decide which option is more desirable.

Old Machine New Machine Original cost of machine at acquisition $ 1,600,000 $ 2,000,000 Useful life from date of acquisition 7 years 5 years Expected annual cash operating expenses:    Variable cost per gallon $1.20 $1.00    Total fixed cash costs $ 400,000 $ 160,000 Estimated cash value of machines follows: Old Machine New Machine January 2, Year 1 $ 400,000 $ 2,000,000 December 31, Year 3 $200,000 0 December 31, Year 5       0                 $500,000

ASSAL   is subject to a 40% income tax rate on all income. Assume the company uses the straight-line method for books and tax purposes. Assume that tax depreciation is calculated without regard to salvage value. Use an after-tax discount rate of 10%

Answer 1

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