Question
Sigma Inc. is planning to replace their existing equipment with a newer version that will increase productivity significantly. It will produce goods with more consistent
Sigma Inc. is planning to replace their existing equipment with a newer version that will increase productivity significantly. It will produce goods with more consistent quality, allowing the firm to increase prices. Consequently, sales are expected to increase by $100,000 and operating costs will be reduced by $50,000. The new machine will cost $500,000 with an economic (and depreciable) life of 5 years. The old machine has been fully depreciated to a book value of zero and can be sold currently for $50,000. Net working capital of $25,000 will be required in year 0 and none thereafter. If the company has a cost of capital of 15%, should they purchase this new machine? Assume the effective tax rate is 30%
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