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?