Dale Davis Company Is Evaluating a Proposal to Purchase a New

question 2

Essay

Dale Davis 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: 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.
Dale Davis's cost of capital is 14 per cent.
Required:
Should the new machine be purchased? Why or why not?

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Definitions:

Utility Maximization

The economic principle that individuals or firms aim to achieve the highest level of utility or satisfaction possible, given their resources.

Bargaining Units

Groups of employees with a clear and identifiable community of interests in wages, hours, and working conditions, which are represented collectively in negotiating labor contracts.

NLRB

The National Labor Relations Board, a federal agency in the United States that oversees labor practices, ensuring workers' right to organize and decide on union representation.

Representation Election

A voting process conducted, typically under the auspices of a labor relations board, in which employees decide whether or not they wish to be represented by a union.