The Quintana Electronic Company is considering purchasing a new robot-welding equipment to perform operations currently being performed by less efficient equipment. The new machine's purchase price is $150,000 delivered and installed. A Quintana industrial engineer estimates that the new equipment will produce savings of $30,000 in labor and other direct costs annually when compared with the current equipment. He estimates the proposed equipment's economic life at 10 years with a zero salvage value. The current equipment is in good working order and will last, physically, for at least 10 more years. Quintana Company expects to pay income taxes of 40%, and any gains also will be taxed at 40%. Quintana uses a 10% discount rate for analysis performed on an after-tax basis. Depreciation of the new equipment for tax purposes is computed on the basis of a seven-year MACRS property class (10 points).
(a) Assuming that the current equipment has zero book value and zero salvage value, should the company buy the proposed equipment?
(b) Assuming that the current equipment is being depreciated at a straight-line rate of 10%, has a book value of $72,000 (cost, $120,000; accumulated depreciation, $48,000), and zero net salvage value today, should the company buy the proposed equipment?
(c) Assuming that the current equipment has a book value of $72,000, a salvage value today of $45,000, and if the current equipment is retained for 10 more years, its salvage value will be zero, should the company buy the proposed equipment?
(d) Assume that the new equipment will save only $15,000 a year, but that its economic life is expected to be 12 years. If other conditions are as described in part (a), should the company buy the proposed equipment?