Assume that laban Company is considering the purchase of a newer, more efficient yogurt-making machine....
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Accounting
Assume that laban Company is considering the purchase of a newer, more efficient yogurt-making machine. If purchased, it would require the new machine on January 2, year 1. laban expects to sell 600,000 gallons of yogurt in each of the next five years at a $2 per gallon selling price. laban has two options:
(1) continue to operate the old machine purchased four years ago or (2) sell it and purchase the new machine.
The following information has been prepared to help decide which option is more desirable.
| old machine | new machine | |
|---|---|---|
| Original cost of machine at acquisition | $1,600,000 | $2,000,000 |
| Useful life from date of acquisition | 7 years | 5 years |
| Expected annual cash operating expenses: | ||
| variable cost per gallon | $1.20 | $1.00 |
| total fixed cash costs | $400,000 | $160,000 |
depreciation is as follows:
| age of equipment (years) | tax depreciation rate |
|---|---|
| 1 | 15% |
| 2 | 25% |
| 3 | 20% |
| 4 | 20% |
| 5 | 20% |
| Estimated cash value of machines follows: | old machine | new machine |
| January 2, year 1 | $ 400,000 | $ 2,000,000 |
| 31 December, year 3 | $ 200,000 | $ 1,000,000 |
laban is subject to a 40% income tax rate on all income. Assume that tax depreciation is calculated without regard to salvage value. Use an after-tax discount rate of 10%.
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