My teacher gave me the answer to this problem, just need to know how to get to t
ID: 2758991 • Letter: M
Question
My teacher gave me the answer to this problem, just need to know how to get to those answers Quick Manufactuuring Company Rep. a 42 13-16 The Quick Manufacturing Company, a large prof- itable corporation, is considering the replacement of a production machine tool. A new machine would cost $3700, have a 4-year useful and depreciable life, and have no salvage value. For tax purposes, sum- of-years'-digits depreciation would be used. The ex- isting machine tool was purchased 4 years ago at a cost of $4000 and has been depreciated by straight- line depreciation assuming an 8-year life and no sal- vage value. The tool could be sold now to a used equipment dealer for $1000 or be kept in service for another 4 years. It would then have no salvage value. The new machine tool would save about $900 per year in operating costs compared to the existing machine. Assume a 40% combined state and federal tax rate.Explanation / Answer
Option 1 Buy new machine Costs Innitial cost of 3700 Income tax benefit on Dep Net Saving (after tax) Salvage income from sale of old machine Option 2 Continue with old machine Cost No additional cost Income Tax Benefit on dep. Assumption : Discount rate is assumed to be 10% Working :- 1 calculation of depreciation of new machine SYD= 4(4+1)/2 10 Year Remaining useful file SYD %age Depreciation Tax rate Tax benefit 1 4 4/10 40.00% 1480 40% 592 2 3 3/10 30.00% 1110 40% 444 3 2 2/10 20.00% 740 40% 296 4 1 1/10 10.00% 370 40% 148 10 100.00% 3700 2 calculation of depreciation of old machine Cost 4000 Life 8 year Dep 500 Dep. For 4 years 2000 WDV 2000 Salvage value 1000 Loss 1000 Tax rate 40% Net tax benefit 400 Option 1 Year Outflows Tax benefit on dep. Net Annual saving Salvage Value Net cash flows PV @ 10% Present value 0 3700 1000 -2700 1 -2700 1 592 540 1132 0.909 1029.09 2 444 540 984 0.826 813.22 3 296 540 836 0.751 628.10 4 148 540 688 0.683 469.91 240.33 Option 2 Year Tax benefit on Dep PV @ 10% Present Value 0 1 0 1 200 0.909 181.82 2 200 0.826 165.29 3 200 0.751 150.26 4 200 0.683 136.60 633.97 So, from above it is been noticed that company should go with existing machine as it will be more beneficial.
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