Berradi Corp. is considering the purchase of a new stamping machine to manufacture its product. The following

Question:

Berradi Corp. is considering the purchase of a new stamping machine to manufacture its product. The following information is available:

New Machine

Purchase cost new ……………………….. $85,000

Annual increase in cash revenues ………….. 60,000

Annual increase in cash operating costs ……. 42,000

Salvage value—10 years from now …………. 5,000

If Berradi purchases the new machine, it will use it for 10 years and then trade it in on another machine. The company computes depreciation on a straight-line basis, for both taxes and financial reporting purposes. Assume Berradi currently has an old stamping machine with a book value of $30,000 that it can currently dispose of for $8,000 if it buys the new machine. Assume Berradi’s cost of capital is 14%, and its tax rate is 30%. Should the new machine be purchased based on the NPV method?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...