Dale Davis Company Is Evaluating a Proposal to Purchase a New

Essay

Dale Davis Company is evaluating a proposal to purchase a new machine that would cost £100,000 and have a salvage value of £10,000 in four years. It would provide annual operating cash savings of £10,000, as follows: $\begin{array}{lrr}&\text { Old Machine }&\text { New Machine }\\\text { Salaries } & £ 40,000 & £ 36,000 \\\text { Supplies } & 7,000 & 5,000 \\\text { Maintenance } &\underline{9,000} & \underline{5,000} \\\text { Total } & £ 56,000 & £ 46,000\end{array}$
If the new machine is purchased, the old machine will be sold for its current salvage value of £20,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of £2,000. The old machine's present book value is £40,000. If kept, in one year the old machine will require repairs predicted to cost £35,000.
Dale Davis's cost of capital is 14 per cent.