Runder Company Is Evaluating a Proposal to Purchase a New

question 58

Essay

Runder Company is evaluating a proposal to purchase a new machine that would cost $100,000 and have a salvage value of $10,000 in four years. It would provide annual operating cash savings of $10,000, as follows: $\begin{array}{lrr}&\text { old Machine }&\text { New Machine }\\\text { Salaries } & \$ 40,000 & \$ 36,000 \\\text { Supplies } & 7,000 & 5,000 \\\text { Maintenance } & 9,000 & 5,000 \\\text { Total }&\$56,000&\$46,000\end{array}$ 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 four years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in one year the old machine will require repairs predicted to cost $35,000.
The company's cost of capital is 14%.
Required: Should the new machine be purchased? Why or why not?

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Definitions:

Total Number

The entirety or sum of units or elements in a set or group, quantifying the amount present or involved.

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A widespread occurrence of an infectious disease in a community at a particular time, significantly exceeding the expected baseline.

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The insufficient or inappropriate use of antibiotics which can lead to ineffective treatment of infections and contribute to the development of antibiotic resistance.