Replacing Old Equipment at an Immediate Cost of $75 000

question 24

Essay

Replacing old equipment at an immediate cost of $75 000 and an additional outlay of $10 000 six years from now will result in savings of $3120 per quarter for 11 years. The required rate of return is 8% compounded annually. Use the net present value method to determine whether the company should replace old equipment or not.

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Definitions:

Journal Entry

A record in accounting that notes transactions and changes in financial statements.

Net Pay

The amount of money an employee takes home after all deductions, such as taxes and benefits, are taken out of their gross salary.

FICA Tax

Federal Insurance Contributions Act tax; a United States federal payroll (or employment) tax imposed on both employees and employers to fund Social Security and Medicare.

Federal Income Taxes

Federal income taxes are taxes levied by the national government on taxable income of individuals, corporations, trusts, and other legal entities.