A company owns a packaging machine, which was purchased three years ago for $56,000. It has a remaining useful life of five years, providing that it has a major overhaul at the end of two more years of life, at a cost of $10,000. Its disposal value now is $20,000; in five years, its disposal value will be $8,000. The cash operating costs of this machine are expected to continue at $40,000 annually. A manufacturer has offered a substitute machine for $51,000 in cash. The new machine will reduce annual cash operating costs by $10,000, will not require any overhauls, will have a useful life of five years, and will have a disposal value of $3,000.

1. STRAIGHT LINE DEPRECIATION FOR TAXES, NO PROVISION FOR RESIDUAL VALUE

Assume that the minimum desired rate of return, after taxes, 10%. Using the net present value technique show whether the new machine should be purchased. Assume that income tax rates are 35% on ordinary income. Assume that all taxes are paid in the same year that the taxable income was earned. finally assume that a zero residual used for tax purposeswill not be challenged by the IRS

2. DOUBLE DECLINING BALANCE DEPRECIATION FOR TAXES, NO PROVISION FOR RESIDUAL VALUE

Assume that the minimum desired rate of return, after taxes, 10%. Using the net present value technique show whether the new machine should be purchased. Assume that income tax rates are 35% on ordinary income. Assume that all taxes are paid in the same year that the taxable income was earned. finally assume that a zero residual used for tax purposes will not be challenged by the IRS

MUST HAVE DETAIED RESPONSE FOR UNDERSTANDING

Using the data provided and answer to scenerio 1 and 2 is needed.