Management of Moore City Trust Is in the Process of Evaluating

question 24

Essay

Management of Moore City Trust is in the process of evaluating the purchase of a new check sorting machine. The model under review will cost $44,000 and will require installation costs of $5,000. Similar machines have a ten-year life, and management has estimated that this sorter will have a residual value of $2,500 at the end of its life. Annual cost savings to be generated by the sorter will average $9,500 over the ten-year period. Management's minimum desired before-tax rate of return is 14 percent.
Present value multipliers:
$\begin{array}{lrrr} & \text { 9 Percent } & \mathbf{1 4} \text { Percent } & \text { 16 Percent } \\\text { Present value of } \$ 1 \text { at end of ten years } & .422 & .270 & .227 \\\text { Present value of } \$ 1 \text { received in each of the next ten } & 6.418 & 5.216 & 4.833 \\\text { years } & &\end{array}$
a. Using before-tax information and the net present value method to evaluate this capital investment, determine whether the company should purchase the check sorting machine. Support your answer.
b. If management had decided on a minimum desired before-tax rate of return of 16 percent, should the check sorting machine be purchased? Show all computations to support your answer. Round answers to nearest dollar.

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Definitions:

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