Acme Dry cleaning has an on-campus location with 5 years to go on its lease. An...

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Acme Dry cleaning has an on-campus location with 5 years to goon its lease. An existing dry cleaning machine will last for the5-year duration of the lease, at which time it will be worn out andworthless. A machine will be more efficient and will allow thecompany to handle a broader range of fabrics. As a result, the newmachine will increase revenues by $1,500 a year and decreaseoperating costs (other than depreciation) by $600 per year.
The old machine was purchased two years ago (purchase price =$8,000) and has a 3-year life for depreciation purposes. The oldmachine could be sold today for $6,000. The new machine will cost$15,000, last 5 years, and has a 3-year life for depreciationpurposes. The new machine is expected to have a re-sale value of$5,000 in 5 years (when the lease is up).
Since revenue are expected to increase, the company will need tokeep an additional $250 of petty cash in the storee's cash registerbeginning at time 1. This petty cash balance will need to beincreased by an additional 100$ at time 2. This $350 (250 + 100)will be removed at time 5.
Acme Dry cleaning is in the 40 percent tax bracket and usesstraight line depreciation. The required return for projects ofthis risk class is 18%. Should Acme purchase the new machine?Provide a numerical solution.

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3.8 Ratings (320 Votes)

For evaluating if purchase of new machine is a good decision ornot the Net present value of such action is to be calculatedAll amounts in Therefore the net present value of the decision is Sum of allyears See Answer

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Acme Dry cleaning has an on-campus location with 5 years to goon its lease. An existing dry cleaning machine will last for the5-year duration of the lease, at which time it will be worn out andworthless. A machine will be more efficient and will allow thecompany to handle a broader range of fabrics. As a result, the newmachine will increase revenues by $1,500 a year and decreaseoperating costs (other than depreciation) by $600 per year.The old machine was purchased two years ago (purchase price =$8,000) and has a 3-year life for depreciation purposes. The oldmachine could be sold today for $6,000. The new machine will cost$15,000, last 5 years, and has a 3-year life for depreciationpurposes. The new machine is expected to have a re-sale value of$5,000 in 5 years (when the lease is up).Since revenue are expected to increase, the company will need tokeep an additional $250 of petty cash in the storee's cash registerbeginning at time 1. This petty cash balance will need to beincreased by an additional 100$ at time 2. This $350 (250 + 100)will be removed at time 5.Acme Dry cleaning is in the 40 percent tax bracket and usesstraight line depreciation. The required return for projects ofthis risk class is 18%. Should Acme purchase the new machine?Provide a numerical solution.