Question
The Chief Operating Manager of Polycorp purchased a new machine (Machine A) for the corporation. The details for Machine A appear below. Following the purchase
The Chief Operating Manager of Polycorp purchased a new machine (Machine A) for the corporation. The details for Machine A appear below. Following the purchase of Machine A, the results of a feasibility study commissioned by the Chief Financial Controller were announced. Another machine was identified, Machine B that is suitable for the needs of Polycorp. The details of this machine appear below. The corporation has an after-tax required rate of return of 10%pa for the project. The company tax rate is 30%. Use straight line depreciation.
Machine A
Cost $380,000 already paid for and not refundable, but the machine can be sold for $300,000 now.
The Machine has not been installed yet and will incur installation costs of $49,000. Machine A has a useful life of 3 years, at the end of which it will have a salvage value of $50,000. The machine will produce annual revenues of $1,400,000 and cash operating expenditures of $950,000.
Machine B
The feasibility study cost $60,000 and has been paid. Machine B can be purchased for $400,000 and will incur installation costs of $21,000. The salvage value after a life of three years is $30,000. It will have annual operating revenues of $1,500,000 and annual operating expenditure of $1,000,000
Using NPV after tax analysis, determine whether Polycorp should proceed with Machine A or whether they should sell it and acquire Machine B.Explain and defend your answer and calculations.
Step by Step Solution
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Step: 1
To determine whether Polycorp should proceed with Machine A or acquire Machine B we will use the Net Present Value NPV aftertax analysis NPV helps eva...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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