288. 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 costs 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. Calvin expects to realize a before-tax annual reduction in labor costs of $30,000 if the new machine is purchased and placed in service. If the new machine is purchased, the incremental cash flows for the fifth year would amount to a. $18,000. b. $24,000. c. $26,000. d. $30,000.

2D1B CALVIN INC. IS CONSIDERING THE PURCHASE OF A NEW STATE-OF-ART MA...

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288.

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

Original cost

$50,000

$90,000

Installation costs

4,000

Freight and insurance

6,000

Expected end salvage value

Depreciation method

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. Calvin expects to realize a before-tax annual reduction in labor costs of

$30,000 if the new machine is purchased and placed in service.

If the new machine is purchased, the incremental cash flows for the fifth year would

amount to

$18,000.

$24,000.

$26,000.

$30,000.