Redo Problem 14.3 with the following additional information. The asset is classified as a seven-year MACRS.
Question:
• The asset is classified as a seven-year MACRS.
• The firm's marginal tax rate is 40%, and its after-tax MARR is 10%.
In Problem 14.3
Komatsu Cutting Technologies is considering replacing one of its CNC machines with one that is newer and more efficient. The firm purchased the CNC machine 10 years ago at a cost of $135,000. The machine had an expected economic life of 12 years at the time of purchase and an expected salvage value of $ 12,000 at the end of the 12 years. The original salvage estimate is still good, and the machine has a remaining useful life of two years. The firm can sell this old machine now to another firm in the industry for $30,000. The new machine can be purchased for $165,000, including installation costs. It has an estimated useful (economic) life of eight years. The new machine is expected to reduce cash operating expenses by $30,000 per year over its eight-year life, at the end of which the machine is estimated to be worth only $5,000. The company has a MARR of 12%.
(a) If you decided to retain the old machine, what is the opportunity (investment) cost of retaining the old asset?
(b) Compute the cash flows associated with retaining the old machine in years one and two.
(c) Compute the cash-flows associated with purchasing the new machine in years one through eight.
(d) If the firm needs the service of these machines for an indefinite period and no technology improvement is expected in future machines, what will be your decision? 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... MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...
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a Book value 0 Ordinary gains 30000 0 30000 Gains tax 30000 04 12000 Opportunity cost ...View the full answer
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