A Manufacturing Company Is Considering the Purchase of a New

question 6

Essay

A manufacturing company is considering the purchase of a new CNC lathe, which will cost $60,000 and has an
annual maintenance cost of $8,000. A few parts in the lathe need to be replaced once every 5 years to enable
smooth running of the lathe. This would cost an additional $20,000 (once every 5 years). Assuming that the lathe
would last 15 years under these conditions, what is the total equivalent cost (present value) of this investment at
an interest rate of 12%? (Assume that there will be no appreciable salvage value at the end of 15 years.)

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Definitions:

Treasury Stock

Shares that were issued and subsequently reacquired by the issuing corporation, reducing the number of shares outstanding in the market.

Gain On Sale

The profit realized from the sale of an asset, when the selling price exceeds its original purchase price.

Paid-In Capital

Paid-In Capital is the amount of money that shareholders have invested in a company through the purchase of stock, exclusive of earnings retained in the business.

Par Value

The nominal or face value of a bond, share of stock, or other securities, as stated by the issuing company.