Marion Dexter Company is evaluating a proposal to purchase a new machine that would cost...
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Marion Dexter Company is evaluating a proposal to purchase a new machine that would cost $100,000 and have a salvage value of $10,000 in four years. It would provide annual operating cash savings of $10,000, as follows:
Old Machine New Machine
Salaries $ 40,000 $ 36,000
Supplies 7,000 5,000
Maintenance 9,000 5,000
Total $56,000 $46,000
If the new machine is purchased, the old machine will be sold for its current salvage value of $20,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of $2,000. The old machine's present book value is $40,000. If kept, in one year the old machine will require repairs predicted
to cost $35,000. Marion Dexter's cost of capital is 14 percent. Required:
Should the new machine be purchased? Why or why not?
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