2D1B CALVIN INC. IS CONSIDERING THE PURCHASE OF A NEW STATE-OF-ART MA...
299.
CSO: 2D1b
LOS: 2D1b
Calvin Inc. is considering the purchase of a new state-of-art machine to replace its hand-
operated machine. Calvin's effective tax rate is 40%, and its cost of capital is 12%. Data
regarding the existing and new machines are presented below.
Existing
New
Machine
Machine
Original cost
$50,000
$90,000
Installation cost
0
4,000
Freight and insurance 0
6,000
Expected end salvage value
0
0
Depreciation method straight-line
straight-line
Expected useful life
10 years
5 years
The existing machine has been in service for seven years and could be sold currently for
$25,000. If the new machine is purchased Calvin expects to realize a $30,000 before-tax
annual reduction in labor costs.
If the new machine is purchased, what is the net amount of the initial cash outflow at
Time 0 for net present value calculation purposes?
a.
$65,000.
b.
$75,000.
c.
$79,000.
d.
$100,000.