Taylor Toy Corp. (11-9)
Taylor Toy Corp. is considering the replacement of it injection molding machine. It is 2 years old but new technology has it considering the newest model.
- The old (current) machine was acquired 2 years ago and is being depreciated on a straight line basis over 8 years (6 years remaining).The annual depreciation expense is $350 per year, and its current book value is $2,100. It can be sold for $2,500 today. If the machine is not replaced, it is expected to be sold for $500 at the end of its remaining life (6 yrs).
- The new, replacement machine will cost $8,000. It is expected to be used for 6 years, and is expected to be sold for $800 then. It will be depreciated using MACRS (5-year class with 1⁄2 year convention).
- The new machine is expected to support an increase in sales by $1,000 per year, and with its improved electrical efficiency, it should reduce operating expenses by $1,500 per year.
- Inventories will need to increase by $2,000 and Account payable will increase by $500.
- The company's tax rate is 40%.
- Taylor Toy's Cost of Capital is 15%, which is the appropriate Hurdle Rate for this project.
- Using a blank workbook, evaluated this project:
- Present the cash flows
- Calculate the evaluation measures.
- Should Cookeville Technical Productions replace the machine?