The container corporation of America is considering replacing an automatic paint
ID: 1188529 • Letter: T
Question
The container corporation of America is considering replacing an automatic painting machine purchased 9 years ago for the $700,000. It has a market value today of $40,000. The unit costs $350,000 annually to operate and maintain. A new unit can be purchased for $800,000 and will have annual O&M costs of $120,000. If the old unit is retained, it will have no salvage value at the end of its remaining life of 10 years. The new unit, if purchased, will have a salvage value of $100,000 in 10 years. Using a EUAC measure and a MARR of 20%, perform a before tax analysis to see if the automatic painting machine should be replaced if it is taken as a trade-in for its market value of $40,000.
a. Use the cash flow approach (insider%u2019s view approach)
b. Use the opportunity cost approach (outsider%u2019s view point approach
Explanation / Answer
If New Machine Is Purchased Present Value of cash outflows Amount ($) Cost of new machine 800000 Less: Sale of Old Machine 40000 Present Value of cash outflows 760000 Present Value Of cash Inflows Decrease In Annual O&M Cost 230000 Less: Increase In Depreciation 35000 PBT 195000 Add:Depreciation 35000 Cash Profit After Tax 230000 Total 964160 Add: Present Value Of salvage 16100 (100000*0.161) Present Value Of cash Inflows 980260 Net Present Value 980260-760000= $220260 Notes Tax Benefit if available on sale of old machine can be availed Decision Old Machine should be replaced with the new Machine
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