Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 39

Eastern Educational Services is considering the following proposal to sell its teaching machine and purchase a new, improved machine. The following data are presented by the department head:
Additional information:
1. The company expects to produce 10,000 units a year selling at $10 each with either machine.
2. The company's tax rate is 40 percent on all income and expenses.
3. All annual income and expenses are assumed to occur at year-end.
4. The company's cost of capital is 12 percent after taxes.
5. The firm is located in a European country where capital gains are taxed at 40 percent. Capital gains are computed as the difference between the sales price and book value (original cost less accumulated depreciation).
Required:
a. Present a financial analysis in which you evaluate the proposal. A clear presentation is important.
b. Would you be more likely, less likely, or equally likely to recommend the purchase of the new machine given the following:
(i) The company's discount rate is increased.
(ii) The new machine can be depreciated by the double-declining-balance method.