Dale Davis Company Is Evaluating a Proposal to Purchase a New

question 159

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 4 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 4 years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in 1 year the old machine will require repairs predicted to cost $35,000.
Dale Davis's cost of capital is 14%.
Required: Should the new machine be purchased? Why or why not?

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Definitions:

Transaction Gains

Refers to the profits realized from the buying and selling of assets or securities within a specific timeframe.

Tax Deductible

Expenses that can be subtracted from gross income to reduce the amount of income subject to tax.

Translation Losses

Financial losses resulting from converting the financial statements of a foreign subsidiary into the parent company's currency.

Foreign Governments

The governing bodies of nations other than one's own, which may interact through diplomacy, trade, and other forms of engagement.