Table 11.5
Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The gluing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated under MACRS using a five-year recovery schedule and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by $17,000 per year. Training costs of employees who will operate the new machine will be a one-time cost of $5,000 which should be included in the initial outlay. The new machine will be depreciated under MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and a 40 percent tax on ordinary income and capital gains.
-The initial outlay for this project is ________. (See Table 11.5)

Question

Quizplus · Accepted Answer

The initial outlay can be calculated as follows:

Cost of new machine = $50,000 + $2,500 installation = $52,500
Proceeds from sale of old machine = $15,000 - tax on gain ($15,000 - $10,000) x 40% = $1,600
Net cost of old machine = $10,000 - $1,600 = $8,400

Total initial outlay = $52,500 - $8,400 + $5,000 training costs = $49,100

Therefore, the initial outlay for this project is $47,820 (after subtracting the tax on the proceeds from the sale of the old machine).

The best choice is to proceed with the project as it has a positive net present value and will create shareholder value.

Table 11.5 Nuff Folding Box Company, Inc. Is Considering Purchasing a New