The Taylor Corporation Is Using a Machine That Originally Cost

question 30

Essay

The Taylor Corporation is using a machine that originally cost $88,000. The machine is being depreciated by the straight-line method over eight years ($11,000 per year) and has four years of depreciation remaining. The machine has a book value of $44,000 and a current market value of $40,000. Jacqueline Elliott, the Chief Financial Officer of Taylor, is considering replacing this machine with a newer model costing $75,000. The new machine will save $5,000 in after-tax earnings each year for the next six years. The new machine is in the 5-year MACRS category. Taylor Corporation is in the 34% tax bracket and has a 10% cost of capital.
a) Calculate the cash inflows from the sale of the old machine.
b) Calculate the net cost of the new machine.
c) Calculate the incremental depreciation on the new versus the old machine.
d) Determine the net present value of the new machine. Should they purchase the new machine?

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Definitions:

Trade Acceptance

A draft that is drawn by a seller of goods ordering the buyer to pay a specified sum of money to the seller, usually at a stated time in the future. The buyer accepts the draft by signing the face of the draft, thus creating an enforceable obligation to pay the draft when it comes due. On a trade acceptance, the seller is both the drawer and the payee.

Draft

A preliminary version of a document or an order for payment issued by one party to another.

Buyer

An individual or entity that purchases goods or services from another party in an exchange transaction.

Pay

The monetary compensation received by an individual for their services or work.