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In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1,
In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, 20X4. The following information is being considered by Gunning Industries. The new machine would be purchased for $160,000 in cash. Shipping, installation, and testing would cost an additional $30,000. The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and total fixed costs of $40,000 per year, The investment in the new machine will require an immediate increase in working capital of $35,000. Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of five years and zero salvage value. Gunning is subject to a 40 percent corporate income tax rate. Gunning uses the net present value method to analyze investments and will employ the following factors and rates.
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