Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please Answer the following: Which option should ABX go with: 1) continue to operate the old machine purchased four years ago 2) sell it and

Please Answer the following:

Which option should ABX go with:

1) continue to operate the old machine purchased four years ago

2) sell it and purchase the new machine.

image text in transcribed
Assume that ABX Company is considering the purchase of a newer, more efficient yogurtmaking machine. If purchased, it would require the new machine on January 2, year 1. ABX expects to sell 600,000 gallons of yogurt in each of the next five years at a $2 per gallon selling price. ABX has two options: [1] continue to operate the old machine purchased four years ago or [2] sell it and purchase the new machine. The following information has been prepared to help decide which option is more desirable. Old Machine New Machine Original cost of machine at acquisition 5 1,600,000 5 2,000,000 Useful life from date of acquisition T years 5 years Expected annual cash operating expenses: Variable cost per gallon $1.20 $1.00 Total fixed cash costs 5 400,000 5 150,000 Depreciation is as follows: Tax Age of Equip Depreciation | [years] Rate 1 15% 2 25% 3 20% 4 20% 5 20% Estimated cash value of machines follows: Old Machine New Machine January 2, Year 1 $ 400,000 $ 2,000,000 December 31, Year 3 $200,000 $1,000,000 El AB): is subject to a 40% income tax rate on all income. Assume that tax depreciation is calculated without regard to salvage value. Use an aftertax discount rate of 10%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting Volume 2

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy

12th Canadian Edition

1119497043, 978-1119497042

More Books

Students also viewed these Accounting questions

Question

What does the term revenue mean?

Answered: 1 week ago