Question
Kappa Corp has the opportunity to replace a crucial piece of machinery used in its manufacturing process.The existing machine has a net book value of
Kappa Corp has the opportunity to replace a crucial piece of machinery used in its manufacturing process.The existing machine has a net book value of $35,000, with a remaining useful life of 5 years, and no assumed salvage value.The new machine will cost $275,000, with an estimated useful life of 5 years and a salvage value of $20,000.If Kappa agrees to purchase the new machine, the company selling the new machine will purchase the old machine for $30,000.
The existing machine is old and requires frequent repairs.Should Kappa purchase the new machine it anticipates annual savings in operating expenses of $40,000, and an increase in its annual net income of $24,000.
Kappa depreciates all machinery on a straight-line basis and requires that all investments must have a minimum required rate of return of 12%.
Ignore any tax-related computations in responding to the questions below.
Should Kappa decide to purchase the new machine, what will be the payback period?When considering the cost of the new machine, do not forget to consider the trade-in value received for the old machine.
Please showallof your work for full credit and round your answer to the nearest tenth.
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