The Expresso Roast Corporation is considering the purchase of a new coffee bean

Question

The Expresso Roast Corporation is considering the purchase of a new coffee bean roaster and grinder. It is considering two different models - Quick-Roast (QR) and Mellow-Roast (MR). Revenue are expected to be independent of which machine it acquires. The appropriate annual discount rate for Expresso Roast is 8%. The QR machine costs $75,000 and is expected to last 4 years, at which time it is expected to have no salvage value. Tax deductible operating and maintenance costs of the QR machine are expected to be $10,500 per year (in end of year values). The MR machine costs $50,000 and is expected to last 2 years, at which time it is expected to have no salvage value. The MR machine is expected to have operating and maintenance costs of $5,000 per year (in end of year values). Either machine can be depreciated on a straight-line basis over two years under current tax law. The corporate tax rate is 34%. (a) Which machine should Expresso Roast Corporation buy? (b) Would the decision be different if Expresso Roast Corporation did not have to pay any corporate income tax?

Explanation / Answer

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