Problem:
XYZ company is considering replacing an old machine with a new one. Two months ago their chief engineer completed a training seminar on the new machines operation and efficiency. The $3,000 cost for this training session has already been paid. If the new machine is purchased, it would require $7000 in installation and modification costs to make it suitable for operation in the factory. The old machine originally cost $80,000 five years ago and is being depreciated by $10,000 per year. The new machine will cost $100,000 before installation and modification. It will be depreciated by $12,000 per year.The old machine can be sold today for $12,000. The marginal tax rate for the firm is 40%.
Required:
Question: Compute the relevant initial outlay in this capital budgeting decision.
a) $97,800
b) 79,500
c) 87,700
d) $90,800
Note: Provide support for your underlying principle.