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 4 years. It would provide annual operating cash savings of $10,000, as follows:
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 4 years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in 1 year the old machine will require repairs predicted to cost $35,000.
Dale Davis's cost of capital is 14%.
Required: Should the new machine be purchased? Why or why not?

Question

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 4 years. It would provide annual operating cash savings of $10,000, as follows:
  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 4 years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in 1 year the old machine will require repairs predicted to cost $35,000.
Dale Davis's cost of capital is 14%.
Required: Should the new machine be purchased? Why or why not?

Quizplus · Accepted Answer

The Answer of 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 4 years. It would provide annual operating cash savings of $10,000, as follows:
  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 4 years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in 1 year the old machine will require repairs predicted to cost $35,000.
Dale Davis's cost of capital is 14%.
Required: Should the new machine be purchased? Why or why not?

Dale Davis Company Is Evaluating a Proposal to Purchase a New