Question
A machine produces 1000 units of product per day in an existing manufacturing operation. The machine has become obsolete due to tightened product quality standards.
A machine produces 1000 units of product per day in an existing manufacturing operation. The machine has become obsolete due to tightened product quality standards. Replacement machine B will cost $25,000 and can produce up to 1500 units of product per day for the next 3 years with annual escalated dollar operating costs of $7,000 in each the years 1, 2, and 3 for either 1000 or 1500 units per day, with a $3,500 escalated dollar salvage value at the end of year 3.Depreciate the machine using 5-year life MACRS depreciation starting in year 0 with the half-year convention. Assume that other taxable income exists that will permit using all tax deductions in the year incurred. For an effective income tax rate of 40%, what is the break-even cost per unit of the replacement machine "B"? Assuming 250 working days per year, for a minimum escalated dollar DCFROR of 24%. (No use exists for the extra 500 units of product per day that machine B can produce.)
A) 0.0837 B) 0.0887 C) 0.0737 D) 0.0637
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