EIF Manufacturing Company Needs to Overhaul Its Drill Press or Buy

question 28

Essay

EIF Manufacturing Company needs to overhaul its drill press or buy a new one.The facts have been gathered,and they are as follows:
$$\begin{array} { | l | r | r | } \hline & \text { Current Machine } & \text { New Machine } \\\hline \text { Purchase Price, New } & \$ 88,000 & \$ 110,000 \\\hline \text { Current book value } & 33,000 & \\\hline \text { Overhaul needed now } & 44,000 & \\\hline \text { Annual cash operating costs } & 77,000 & 44,000 \\\hline \text { Current salvage value } & 22,000 & \\\hline \text { Salvage value in five years } & 5,500 & 22,000 \\\hline\end{array}$$ Required:
Which alternative is the most desirable with a current required rate of return of 20%? Show computations,and assume no taxes.

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Definitions:

Straight-line Method

A method of calculating depreciation of an asset by evenly spreading its cost over its useful life.

Interest Expense

The cost incurred by an entity for borrowed funds over a period, which can include payments on loans, bonds, or other forms of debt.

Bond Issued At Premium

A scenario when a bond is sold for more than its face value due to interest rates being lower than the bond's coupon rate.

Journal Entry

A record in accounting that represents a transaction where debits and credits are equal, showing a company's financial transactions.