XYZ would like to purchase a new machine. It will cost $50,000. Shipping and ins

Question

XYZ would like to purchase a new machine. It will cost $50,000. Shipping and installation charges for the equipment are expected to total $5,000. This equipment will be depreciated using straight line for its 5 year economic life to an estimated salvage value of zero. In order to use this equipment, XYZ estimates it will have to add $7,000 initially to its net working capital. If the machine is purchased, it will replace a machine with a book value of $10,000, the old machine can be sold for $25,000. During the first year of operations, the company expects total revenues to increase by $50,000, and from years 2 to 5 increase by $60,000 per year. The incremental operating expense is expected to be $10,000 in the first year and increase each year by 5%. The marginal tax rate is 40% Find the yearly depreciation.

Explanation / Answer

First let us find out the total cost of machine:

=> cost + shipping and installation charges =>$50,000 + 5,000 =>$55,000.

given , the machine will be depreciated on a straight line basis over a period of 5 years.

depreciation = (cost - salvage value) / life in years

=>($55,000 - $0) / 5 years.

=>$11,000.per year.

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