One year ago, Caffe Vita Coffee Roasting Co. purchased three smallbatch coffee roasters for $3.3 million. Now
Question:
One year ago, Caffe Vita Coffee Roasting Co. purchased three smallbatch coffee roasters for $3.3 million. Now in 2022, the company finds that new roasters that offer significant advantages are available. The new roasters can be purchased for $4.5 million, and have no salvage value. Both the new and the old roasters are expected to last until 2032. Management anticipates that the new roasters will produce a gross profit of $1.2 million a year, so that, using straight-line depreciation, the annual taxable income will be $750,000. The current roasters are expected to produce a gross profit of $600,000 a year and, assuming a total economic life of 11 years and straight-line depreciation, a profit before tax of $300,000. The current market value of the old roasters is $1.5 million. The company’s tax rate is 35 percent, and its minimum acceptable rate of return is 10 percent.
Ignoring possible taxes on sale of used equipment and assuming zero salvage values at the end of the roasters’ economic lives, should Caffe Vita replace its year-old roasters? LO.1
Step by Step Answer:
Analysis For Financial Management
ISBN: 9781260772364
13th Edition
Authors: Robert Higgins, Jennifer Koski, Todd Mitton