Marion Dexter Company Is Evaluating a Proposal to Purchase a New

question 8

Essay

Marion Dexter Company is evaluating a proposal to purchase a new machine that would cost $100,000 and have a salvage value of $10,000 in four years. It would provide annual operating cash savings of $10,000, as follows: $\begin{array}{lrr}&\text { Old Machine}&\text { New Machine }\\\text { Salaries } & \$ 40,000 & \$ 36,000 \\\text { Supplies } & 7,000 & 5,000 \\\text { Maintenance } & {9,000}&{5,000} \\\text { Total } & \$ 56,000 & \$ 46,000\end{array}$
If the new machine is purchased, the old machine will be sold for its current salvage value of $20,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in one year the old machine will require repairs predicted
to cost $35,000. Marion Dexter's cost of capital is 14 percent.
Required:
Should the new machine be purchased? Why or why not?

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Definitions:

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