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:
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 percent.
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 four 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 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 percent.
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 four 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 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 percent.
Required: Should the new machine be purchased? Why or why not?

Dale Davis Company Is Evaluating a Proposal to Purchase a New