Accounting for Decision Making and Control 7th Edition by Jerold Zimmerman

تمرين 15

Eastern Educational Services
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.