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Treads Corporation Is Considering the Purchase of a New Machine

question 168

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Treads Corporation is considering the purchase of a new machine to replace an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to buy the new machine, the old machine can be sold for $60,000. The old machine would have no salvage value in five years.The new machine would be purchased for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, the company would benefit from annual cash savings of $300,000.Treads Corporation uses a discount rate of 12%. (Ignore income taxes.) Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.The net present value of the project is closest to:

Definitions:

Sales Puffery

Exaggerated or boastful statements about a product or service that are not meant to be taken literally and are thus not legally binding promises or warranties.

Justifiably Relied

A principle where a party's action or decision is based on another's representations or promises, perceived as reasonable.

Representation

The act of standing in for or acting on behalf of others, or the presentation of information in a particular manner.

Detrimental Reliance

A legal term describing a situation where an individual suffers harm by relying on a promise or representation made by another.