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Required information Problem 20-40 (Algo) Compensation; Net Present Value [LO 20-2] [The following information applies to the questions displayed below.] Kate's Candy Corporation makes
Required information Problem 20-40 (Algo) Compensation; Net Present Value [LO 20-2] [The following information applies to the questions displayed below.] Kate's Candy Corporation makes chewy chocolate candies at a plant in Winston-Salem, North Carolina. Steve Bishop, the production manager at this facility, installed a packaging machine last year at a cost of $640,000. This machine is expected to last for 10 more years with no residual value. Operating costs for the projected levels of production, before depreciation, are $128,000 annually. Steve has just learned of a new packaging machine that would work much more efficiently in the production line. This machine would cost $742,400 installed, but the annual operating costs would be only $51,200 before depreciation. This machine would be depreciated over 10 years with no residual value. He could sell the current packaging machine this year for $320,000. Steve has worked for Kate's Candy for 7 years. He plans to remain with the firm for about 2 more years, when he expects to become a vice president of operations at his father-in-law's company. Kate's Candy pays Steve a fixed salary with an annual bonus of 5% of net income for the year. Assume that Kate's Candy uses straight-line depreciation and has a 10% required rate of return. Ignore income tax effects.
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