Question
The XYZ Corporation is considering the purchase of a new milling machine for its RH-widgets. The machinery is expected to cost $350,000 and last a
The XYZ Corporation is considering the purchase of a new milling machine for its RH-widgets. The machinery is expected to cost $350,000 and last a total of 10 years having a salvage value of $20,000 for scrap at the end of its life. According to MACRS classification of machinery this asset should have a depreciable life of seven (7) years and this is the method of depreciation they want to use.
XYZ expects the machine to save the company about $95,000 per year in operating costs over the 10 years of its expected economic life. The require rate of interest (MARR) that ABC wants all investments to earn as a minimum is 10%.
ABC operates in a state that has a 6% state tax rate for a company earning what ABC does and ABC is in the 36% federal income tax rate level as well.
If XYZ does this they are thinking of borrowing 80% of the installed cost from 1st Federal at a rate of 8% for a period of 8 years (the loan would cost them 8% per year of the unpaid balance of the loan for 8 years).
If ABC decided to pay all the machine installed cost from internal funds and not borrow money for the machine, answer the following questions:
If ABC were to lease the machine for $85,000 per year would this be worthwhile?
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