Question
Beta Company is considering the purchase of a new equipment to automate part of their manufacturing process. The old system can be sold for $55,000.
Beta Company is considering the purchase of a new equipment to automate part of their manufacturing process. The old system can be sold for $55,000. The new system will cost $4,500,000 and will last for 10 years. The new equipment will have a salvage value of 45,000 at the end of its useful life. The companys cost of capital is 14%. A working capital of $100,000 is necessary in the first year and another $150,000 is needed at the end of year 7 to run the new equipment. The investment in working capital will be recovered at the end of the useful life. The new equipment will increase production and sales by 15% annually. Unit selling price and variable cost per unit will remain unchanged. | ||||||||
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The annual cash savings associated with the system are as follows: | ||||||||
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