Redding Industries is considering the acquisition of a new machine that would reduce operating costs by £100,000 per year throughout its life. The machine has a cost of £300,000 and has an expected salvage value of £25,000 at the end of 4 years. The tax shield (i.e. tax savings) from capital allowances is £34,000; £45,344; £15,111; and £7,555 for Years 1-4, respectively. The company is at the 34 per cent tax rate. The present value factors at the company's required rate of return are as follows: Required:
(Round all calculations to the nearest pound.)
a.
Compute the after-tax operating cost savings per year.
b.
Determine the tax cost or tax savings related to the sale of the machine at the end of its useful life.
c.
Prepare a schedule computing the net present value of Redding Industries' investment in the machine.

Question

Redding Industries is considering the acquisition of a new machine that would reduce operating costs by £100,000 per year throughout its life. The machine has a cost of £300,000 and has an expected salvage value of £25,000 at the end of 4 years. The tax shield (i.e. tax savings) from capital allowances is £34,000; £45,344; £15,111; and £7,555 for Years 1-4, respectively. The company is at the 34 per cent tax rate. The present value factors at the company's required rate of return are as follows:  Required:
(Round all calculations to the nearest pound.) 
a.
Compute the after-tax operating cost savings per year.
b.
Determine the tax cost or tax savings related to the sale of the machine at the end of its useful life.
c.
Prepare a schedule computing the net present value of Redding Industries' investment in the machine.

Quizplus · Accepted Answer

The Answer of Redding Industries is considering the acquisition of a new machine that would reduce operating costs by £100,000 per year throughout its life. The machine has a cost of £300,000 and has an expected salvage value of £25,000 at the end of 4 years. The tax shield (i.e. tax savings) from capital allowances is £34,000; £45,344; £15,111; and £7,555 for Years 1-4, respectively. The company is at the 34 per cent tax rate. The present value factors at the company's required rate of return are as follows:  Required:
(Round all calculations to the nearest pound.) 
a.
Compute the after-tax operating cost savings per year.
b.
Determine the tax cost or tax savings related to the sale of the machine at the end of its useful life.
c.
Prepare a schedule computing the net present value of Redding Industries' investment in the machine.

Redding Industries Is Considering the Acquisition of a New Machine