Question

In: Finance

this Let say that juda   Company is considering the purchase of a newer, more efficient yogurt-making...

this

Let say that juda   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. juda   expects to sell 600,000 gallons of milk in each of the next five years at a $2 per gallon selling price.

juda   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

juda   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%.

Solutions

Expert Solution

Based on the given data, pls find below workings;

Have made certain assumptions required:

- Since it is mentioned that the life of the old machine is only 7 years and already fours years have been used, it is assumed that the balance life for serving is only 3 years; Given this assumption, considered cash flows only for next three years; There shall be no initial outflow as the machine is already existing and no upgrading costs etc are spendt as part of initial outlfow; Depreciation (straight line) is considered for the left out 3 years period;

Based on the above, and based on the below workings, it seems continuing with the old machine itself is more feasible than going for investment in to new machine at this point of time;


Related Solutions

ACCOUNTING Let say that ASSAL   Company is considering the purchase of a newer, more efficient yogurt-making...
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...
Assume that laban Company is considering the purchase of a newer, more efficient yogurt-making machine. If...
Assume that laban 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. laban expects to sell 600,000 gallons of yogurt in each of the next five years at a $2 per gallon selling price. laban 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...
Assume that laban Company is considering the purchase of a newer, more efficient yogurt-making machine. If...
Assume that laban 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. laban expects to sell 600,000 gallons of yogurt in each of the next five years at a $2 per gallon selling price. laban 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...
accounting quiz Let say that samo   Company is considering the purchase of a newer, more efficient...
accounting quiz Let say that samo   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. samo   expects to sell 600,000 gallons of milk in each of the next five years at a $2 per gallon selling price. samo   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...
managerial accounting Assume that that Omani   Company is considering the purchase of a newer, more efficient...
managerial accounting Assume that that Omani   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. Omani   expects to sell 600,000 gallons of milk in each of the next five years at a $2 per gallon selling price. Omani   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...
Bottle Limited is considering replacing its current bottling machine with a newer and more efficient one....
Bottle Limited is considering replacing its current bottling machine with a newer and more efficient one. The current machine has a book value of $25,000 and has 5 years useful life remaining. If it was sold now the firm could raise $25,000. The price to purchase a new machine is $240,000, and shipping and installation costs would be $10,000. Estimated useful life of the new machine is 5 years, and at the end of its useful life it is estimated...
A small factory is considering replacing its existing coining press with a newer, more efficient one....
A small factory is considering replacing its existing coining press with a newer, more efficient one. The existing press was purchased three years ago at a cost of $510,000, and it is being fully depreciated according to a 7-year MACRS depreciation schedule and you have taken 3 years of depreciation on the old machine. The CFO estimates that the existing press has 6 years of useful life remaining. The purchase price for the new press is $675,000. The installation of...
The Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one.
REPLACEMENT ANALYSISThe Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $550,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $235,000. The old machine is being depreciated by $110,000 per year,...
Making Money, Inc. is considering the purchase of a new truck so it can make more...
Making Money, Inc. is considering the purchase of a new truck so it can make more money. The truck costs $120,000. Making Money, Inc. had been renting the truck every week for $500 per week plus $1.20 per mile. On average, the truck is traveling 75 miles per week. If Making Money, Inc. purchases the truck, it will only have to pay for diesel fuel and maintenance, at about $.50 per mile. Insurance costs for the new truck are $5,000...
Yummy Brands is considering the purchase of a new machine that dispenses yogurt. The machine cost...
Yummy Brands is considering the purchase of a new machine that dispenses yogurt. The machine cost $300,000, useful life 5 years 0 salvage. Annual revenues and expenses associated with the new machine follow:Sales revenue$325,000Operating Expenses:Advertising$ 30,000Operator salaries 60,000 Ingredients cost 32,000 Maintenance contract 20,000Depreciation ? You have been hired as Yummy Brands chief financial officer and you need to advise the company CEO if the company should invest in this machine. Show your analysis/ calculations in good form for all...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT