Question

Marion Dexter Company is evaluating a proposal to purchase a new machine that would cost $100,000 and have a salvage value of $10,000 in four years. It would provide annual operating cash savings of $10,000, as follows:

Old Machine      New Machine

Salaries $ 40,000              $ 36,000

Supplies 7,000                   5,000

Maintenance 9,000                   5,000

Total $56,000              $46,000

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If the new machine is purchased, the old machine will be sold for its current salvage value of $20,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in one year the old machine will require repairs predicted

to cost $35,000. Marion Dexter's cost of capital is 14 percent.

Required:

Should the new machine be purchased? Why or why not?

Answer 1