Replacement Analysis_Ex

Replacement Analysis_Ex - year class The replacement...

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Replacement Analysis Problem: The Pear Toy Corporation currently uses an injection molding machine that was purchase 2 years ago. This machine is being depreciated on a straight line basis toward a $500 salvage value, and it has 6 years of remaining life. Its current book value is $2,600, and it can be sold for $3,000 at this time. Thus, the annual depreciation expense is ………. . per year. Pear is offered a replacement machine which has a cost of $8,000, an estimated useful life of 6 years, and an estimated salvage value of $800. This machine falls into the MACRS 5-
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Unformatted text preview: year class. The replacement machine would permit an output expansion, so sale would rise by $1,000 per year; even so, the new machine’s much greater efficiency would still cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would simultaneously increase by $500. Tax rate is 40 percent, and its cost of capital is 15 percent. Should it replace the old machine?...
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This note was uploaded on 10/13/2010 for the course BUS 1231 taught by Professor Miko during the Spring '10 term at UC Riverside.

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Replacement Analysis_Ex - year class The replacement...

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