Question
DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine
DeYoung Entertainment Enterprises is considering replacing the latex molding machine it uses to fabricate rubber chickens with a newer, more efficient model. The old machine has a book value of $450,000 and a remaining useful life of 5 years. The current machine would be worn-out and worthless in 5 years but DeYoung can sell it now to a Halloween mask manufacturer for $135,000. The old machine is being depreciated by $90,000 per year for each year of its remaining life. If DeYoung doesnt replace the old machine, it will have no salvage value at the end of its useful life.
The new machine has a purchase price of $775,000, an estimated useful life and MACRS class life of 5 years and an estimated salvage value of $105,000. The applicable depreciation rates are 20%, 32%, 19.20%, 11.52%, 11.52%, and 5.76%. Being highly efficient, it is expected to economize on electric power usage, labor, repair costs and most importantly to reduce the number of defective chickens. In total, an annual savings of $185,000 will be realized if the new machine is installed. The companys marginal tax rate is 25% and the project cost of capital is 12%.
As the deputy treasury manager of DeYoung Entertainment Enterprises, analyze this proposed project and submit your recommendation(s) to the companys Treasurer/CFO and President for consideration.
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