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Accounting for Decision Making and Control 7th Edition by Jerold Zimmerman
Edition 7ISBN: 978-0078136726Accounting for Decision Making and Control 7th Edition by Jerold Zimmerman
Edition 7ISBN: 978-0078136726 Exercise 9
Punch Press
A punch press currently in use has a book value of $1,800 and needs design modifications totaling $16,200, which would be capitalized at the present time and depreciated. The press can be sold for $2,600 now, but it could be used for three more years if the necessary modifications were made, at the end of which time it would have no salvage value.
A new punch press can be purchased at an invoice price of $26,900 to replace the present equipment. Freight-in will amount to $800, and installation will cost $500. These expenses will be depreciated, along with the invoice price, over the life of the machine. Because of the nature of the product manufactured, the new machine also will have an expected life of three years and will have no salvage value at the end of that time.
Using the old machine, operating profits before taxes and depreciation (revenues less costs) are $10,000 the first year and $8,000 in each of the next two years. Using the new machine, operating profits before taxes and depreciation (revenues less costs) are $18,000 in the first year and $14,000 in each of the next two years.
Corporate income taxes are 40 percent, and the same tax rate is applicable to gains or losses on sales of equipment. Both the present and proposed equipment would be depreciated on a straight-line basis over three years. Assuming the company wants to earn a 10 percent rate of return after taxes, should it modify the old machine or purchase the new one?
A punch press currently in use has a book value of $1,800 and needs design modifications totaling $16,200, which would be capitalized at the present time and depreciated. The press can be sold for $2,600 now, but it could be used for three more years if the necessary modifications were made, at the end of which time it would have no salvage value.
A new punch press can be purchased at an invoice price of $26,900 to replace the present equipment. Freight-in will amount to $800, and installation will cost $500. These expenses will be depreciated, along with the invoice price, over the life of the machine. Because of the nature of the product manufactured, the new machine also will have an expected life of three years and will have no salvage value at the end of that time.
Using the old machine, operating profits before taxes and depreciation (revenues less costs) are $10,000 the first year and $8,000 in each of the next two years. Using the new machine, operating profits before taxes and depreciation (revenues less costs) are $18,000 in the first year and $14,000 in each of the next two years.
Corporate income taxes are 40 percent, and the same tax rate is applicable to gains or losses on sales of equipment. Both the present and proposed equipment would be depreciated on a straight-line basis over three years. Assuming the company wants to earn a 10 percent rate of return after taxes, should it modify the old machine or purchase the new one?
Explanation
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Net Present Value (NPV)
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Accounting for Decision Making and Control 7th Edition by Jerold Zimmerman
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