As owner of Falcon Airlines, you are considering the purchase of a new de-icing machine. The...

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As owner of Falcon Airlines, you are considering the purchase ofa new de-icing machine. The machine will be used to remove ice fromthe wings of Falcon’s planes during winter. The new machine willcost $98,000, shipping costs of $2,000, and also will require$3,000 in working capital to support the new machine’s operation.The equipment will be depreciated over a 3-year period using MACRSand will have an expected salvage value of $4,000 at the end of itsexpected economic life of four years. The annual savings associatedwith the machine are expected to be $25,000 per year for the nextfour years. The company will not deduct the salvage value from themachine’s cost when calculating depreciation. The existing de-icingmachine is one year old but is not adequate for the company’sneeds; it can be sold today for $40,000. The equipment waspurchased for $60,000 and was being depreciated over a three-yearperiod using the MACRS method. Falcon uses a hurdle rate of 11% forits capital budgeting projects and has a marginal tax rate of 30%.Determine whether you should purchase the new de-icing machine

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4.1 Ratings (598 Votes)

0 1 2 3 4 Savings in expenses 25000 25000 25000 25000 Incremental depreciation Depreciation of new equipment Rate of depreciation 3333 4445 1481 741 100 Depreciation expense 33330 44450 14810 7410 See Answer

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Transcribed Image Text

As owner of Falcon Airlines, you are considering the purchase ofa new de-icing machine. The machine will be used to remove ice fromthe wings of Falcon’s planes during winter. The new machine willcost $98,000, shipping costs of $2,000, and also will require$3,000 in working capital to support the new machine’s operation.The equipment will be depreciated over a 3-year period using MACRSand will have an expected salvage value of $4,000 at the end of itsexpected economic life of four years. The annual savings associatedwith the machine are expected to be $25,000 per year for the nextfour years. The company will not deduct the salvage value from themachine’s cost when calculating depreciation. The existing de-icingmachine is one year old but is not adequate for the company’sneeds; it can be sold today for $40,000. The equipment waspurchased for $60,000 and was being depreciated over a three-yearperiod using the MACRS method. Falcon uses a hurdle rate of 11% forits capital budgeting projects and has a marginal tax rate of 30%.Determine whether you should purchase the new de-icing machine