Wayne’s Weinie Works has found an opportunity to purchase a more efficient weinie machine. It is expected that the new machine will generate revenues of $32,000 and expenses of $12,000 per year during its 5 year life. It would replace a machine that would generate revenues of $25,000 and expenses of $16,000 for each of the next 5 years.
If purchased, the new machine will cost $28,000 Plus $4,000 in shipping and set-up costs. Due to the increase in efficiency, a one time reduction of the inventory of meat scraps will be $3,000 and current liabilities will also decrease by $1,000. The machine will be depreciated on a 5 year schedule (.20, .32, .19, .12, .11, .06). It will be worth $6,000 in 5 years.
The old machine is 2 years old and costs $25,000 new. It is also on a 5 year depreciation schedule and could be sold today for $15,000. If it is not sold today it’s estimated value will be $4,000 in 5 years. The company has a 40% marginal tax rate and the WACC is 9%.
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