Question
Granger Shipyards is considering replacing an 8-year old riveting machine with a new model that will lower costs by $28,000 per year. The new machine
Granger Shipyards is considering replacing an 8-year old riveting machine with a new model that will lower costs by $28,000 per year. The new machine costs $100,000 (installed) and is expected to have a useful life of 10 years with a salvage value of $5,000. The new machine will be depreciated (SL) to 10 percent of its current cost, and since it requires less inventory than the old machine, it is expected to save $8,000 in working capital costs over the life of the project. The old machine has been fully depreciated and has no salvage value, and it will cost $7,500 to properly dispose of the old machine. As an alternative, a riveting contractor could be hired to do this work at the same cost as the worn-out machine.
Assuming a cost of capital of 12 percent and a tax rate of .40, should the company buy the new machine?
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