Assume that Juneidi Company is considering the purchase of a newer, more efficient yogurt-making

machine. If purchased, it would require the new machine on January 2, year 1. Juneidi expects to sell

600,000 gallons of yogurt in each of the next five years at a $2 per gallon selling price.

Juneidi has two options:

(1) continue to operate the old machine purchased four years ago or

(2) sell it and purchase the new machine.

The following information has been prepared to help decide which option is more desirable.

Original cost of machine at acquisition

old machine $ 1,600,000

new machine $ 2,000,000

Useful life from date of acquisitionold machine 7 years

new machine 5 years

Expected annual cash operating expenses:

Variable cost per gallon

old machine $1.20

new machine $1.00

Total fixed cash costs

old machine $ 400,000

new machine $ 160,000

Depreciation is as follows:

Age of Equip

(years)

Tax

Depreciation

Rate

1 15%

2 25%

3 20%

4 20%

5 20%

Estimated cash value of machines follows: Old Machine New Machine

January 2, Year 1

old machine $ 400,000

new machine$ 2,000,000

December 31, Year 3

old machine $200,000

new machine $1,000,000

Juneidi is subject to a 40% income tax rate on all income. Assume that tax depreciation is calculated

without regard to salvage value. Use an after-tax discount rate of 10%.