Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Blue Sky Ltd. is considering the replacement of one of its older machines that is still capable of doing the job but is considerably inefficient.

Blue Sky Ltd. is considering the replacement of one of its older machines that is still capable of doing the job but is considerably inefficient. A new machine costing $150,000 will reduce annual operating costs from $50,000 per year to $20,000 per year. The new machine will last 10 years and will be amortized for tax purposes at 30 percent. The older machine has a book value of $46,500. The older machine could be sold for $27,500 today. In 10 years the older machine could be scrapped for $8,000, whereas the new machine would still be worth $32,000.

Also, the older machine requires a spare parts inventory (not eligible for tax-related amortization) of $5,000 that is not required by the newer machine. Blue Skys tax rate is 28 percent, and its cost of capital is 15 percent. Would you advise Blue Sky to replace the older machine?Assume the PV of the tax benefits is $39,000.

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

Financial Performance

Authors: Marc Bertoneche, Rory Knight

1st Edition

0750640111, 978-0750640114

More Books

Students also viewed these Finance questions

Question

3. Is it a topic that your audience will find worthwhile?

Answered: 1 week ago

Question

2. Does the topic meet the criteria specified in the assignment?

Answered: 1 week ago