Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume that it is January 1, 2022, and that the Mendoza Company is considering the replacement of a machine that has been used for the

Assume that it is January 1, 2022, and that the Mendoza Company is considering the replacement of a machine that has been used for the past 3 years in a special project for the company. This project is expected to continue for an additional 5 years (i.e., until the end of 2026). Mendoza will either keep the existing machine for another 5 years (8 years total) or replace the existing machine now with a new model that has a 5-year estimated life. Pertinent facts regarding this decision are as follows: Keep Existing Machine Purchase New Machine Purchase price of machine (including transportation, setup charges, etc.) $ 167,000 $ 207,000 Useful life (determined at time of acquisition) 8 years 5 years Estimated salvage value, end of 2026* $ 21,700 $ 26,700 Expected cash operating costs, per year: Variable (per unit produced/sold) $ 0.42 $ 0.36 Fixed costs (total) $ 26,700 $ 25,700 Estimated salvage (terminal) values: January 1, 2022 $ 69,700 December 31, 2026 $ 14,550 $ 25,400 Net working capital committed at time of acquisition of existing machine (all fully recovered at end of project, December 31, 2026) $ 31,700 Incremental net working capital required if new machine is purchased on January 1, 2022 (all fully recovered at end of project, December 31, 2026) $ 11,700 Expected annual volume of output/sales (in units), over the period 2022 to 2026 517,000 517,000 *Note: These amounts are used for depreciation calculations. Assume further that Mendoza is subject to a 30% income tax, for both ordinary income and gains/losses associated with disposal of machinery, and that all cash flows occur at the end of the year, except for the initial investment. Assume that straight-line depreciation is used for tax purposes and that any tax associated with the disposal of machinery occurs at the same time as the related transaction. Required: 1. Determine relevant cash flows (after-tax) at the time of purchase of the new machine (i.e., time 0: January 1, 2022).2. Determine the relevant (after-tax) cash inflow each year of project operation (i.e., at the end of each of years 1 through 5).3. Determine the relevant (after-tax) cash inflow at the end of the project's life (i.e., at the project's disposal time, December 31, 2026). 5. Determine the undiscounted net cash flow (after tax) for the new machine and determine whether, on this basis, the old machine should be replaced.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cost Management A Strategic Emphasis

Authors: Edward Blocher, David E. Stout, Gary Cokins, Kung Chen

4th Edition

0073128155, 978-0073128153

More Books

Students also viewed these Accounting questions