Redding Industries Is Considering the Acquisition of a New Machine

question 49

Essay

Redding Industries is considering the acquisition of a new machine that would reduce operating costs by £100,000 per year throughout its life. The machine has a cost of £300,000 and has an expected salvage value of £25,000 at the end of 4 years. The tax shield (i.e. tax savings) from capital allowances is £34,000; £45,344; £15,111; and £7,555 for Years 1-4, respectively. The company is at the 34 percent tax rate. The present value factors at the company's required rate of return are as follows:
Required: (Round all calculations to the nearest dollar.)

a.
Compute the after-tax operating cost savings per year.
b.
Determine the tax cost or tax savings related to the sale of the machine at the end of its useful life.
c.
Prepare a schedule computing the net present value of Redding Industries' investment in the machine.

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Definitions:

Contract

A legally binding agreement between two or more parties that is enforceable by law.

Court of International Trade

The Court of International Trade is a federal court in the United States that deals with cases involving international trade and customs laws.

Worldwide Jurisdiction

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