Compute After-Tax Net Present Value: World of Chocolate, Inc., is considering the purchase of a newer, more efficient cookie-making machine. If purchased, the new machine would be acquired on January 2, Year 1. World of Chocolate expects to sell 300,000 dozen cookies in each of the next five years. The selling price of the cookies is expected to average $0.50 per dozen. World of Chocolate, Inc., has two options: (1) continue to operate the old machine purchased two years ago or (2) sell the old machine and purchase the new machine. The following information has been assembled to help decide which option is more desirable.

World of Chocolates. Inc.. is subject to an income tax rate of 40 percent on all income.

Required: Use the net present value method to determine whether World of Chocolate. Inc.. should retain the old machine or acquire the new machine. World of Chocolate. Inc.. requires an after-tax return of 16%.

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Original cost of machine at acquisition Useful life from date of acquisition Expected annual cash operating expenses: Variable cost per dozen Total fixed costs Depreciation: Age of Equipment Tax Depreciation (Percent) 15% Old Machine $80,000 7 years New Machine $120,000 5 years $0.20 15,000 $0.14 14,000 1 2 25 3 20 4 20 20 Estimated cash value of machines: January 2, Year 1 December 31, Year 5 40,000 120,000 7,000 20,000