Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Pinkerton Company is considering acquiring a machine from The Michele Gordogiani Corporation for $660,000. The machine will automate a process currently performed manually. The introduction
Pinkerton Company is considering acquiring a machine from The Michele Gordogiani Corporation for $660,000. The machine will automate a process currently performed manually. The introduction of the machine will allow Pinkerton to avoid paying annual salaries and benefits over the life of the project, during which salaries and benefits are not expected to grow. No other revenues or expenses will be affected except for those related to the Butterfly Pins (described below). The machine will occupy floor space currently being used to make Butterfly Pins that contribute $110,000 per year to Pinkerton's before-tax cash flow. If Pinkerton acquires the machine from Michele Gordogiani, it would have to discontinue making the Butterfly Pins. Pinkerton has already spent $19,000 to assemble all of the estimates described herein. The project is expected to last for six years. However, the machine must be depreciated by the straight-line method over a ten-year life to a zero salvage value for income tax purposes. At the end of the project, Pinker- ton expects to be able to sell the machine for $200,000, net of disposal costs. This amount will fall to $50,000 by the end of the tenth year Required Assuming that the appropriate after-tax MARR is fifteen percent, what is the minimum amount of equal annual before-tax savings from salaries and benefits that Pinkerton needs in order to justify acquiring the machine from Michele Gordogani? The relevant income tax rate is 40%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started