11.Duck Lake Diner is considering replacing its old milk-shake machine with a ne

Question

11.Duck Lake Diner is considering replacing its old milk-shake machine with a newer one. The old milk-shake machine is currently worth $1000 and is being depreciated to zero. It was purchased 5 years ago for $2665 and was being depreciated on a straight line basis over its original 8 years life to zero. The new milk-shake machine would cost $2,500.It is being depreciated on a straight line basis over three years to its expected salvage value of $1,200. Both machines require the same upkeep. In three years , the Diner will be closed when traffic is rerouted onto a new highway. The old machine could be sold for $250 at the end of three years. The tax rate is 40%. If Duck Lake Diner’s opportunity cost of capital is 15%, should Duck Lake Diner replace the milk shake machine? Show your workings.

Explanation / Answer

formulas :

original value current value total life salvage/sold value dep per year total dep old machine                       2,665.00         1,000.00                          8.00                         250.00             333.13    2,665.00 new machine                       2,500.00                          3.00                     1,200.00             433.33 1300 opportunity cost for new machine by selling the old machine at current value int rate PA years total cost 1500 15% 3 675 tax benefit Dep PA years tax rate tax savings old machine                          333.13 3 40% 399.75 new machine                          433.33 3 40% 520 Benefit/loss salvage/sold value tax savings opportunity cost total benefit old machine                          250.00 399.75                         649.75 new machine                       1,200.00 520 -675                     1,045.00 It is advisble to replace the old machine

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