Mercil Corporation is going to buy one of the following two machines. Each machi
ID: 2710522 • Letter: M
Question
Mercil Corporation is going to buy one of the following two machines. Each machine meets the specifications for a particular task in the company. Mercil's tax rate is 30 percent and its cost of capital is 15 percent. Which machine should Mercil buy and why?LO3Machine A: Costs $90,000 to acquire and $12,000 cash a year to operate in each year of its 10-year life. Annual depreciation is $9,000, and the machine has no salvage value.Machine B: Costs $50,000 to acquire and $24,600 a year to operate in each year of its 10-year life. Annual depreciation is $5,000, and the machine has no salvage value.
Explanation / Answer
net cost*PVAF@15%,10
5700* 5.01877
= 28606.99
net cost*PVAF@15%,10
15720*5.01877
= 78895.06
28606.99+90000
= 118606.99
78895.06+50000
= 128895.06
118606.99 / 5.01877
= 23632.68
128895.06/5.01877
= 25682.60
since Equated annual cost of machine A is lower ,It should be purchased
Machine A B Annual Depreciation 9000 5000 Tax shield on depreciation 9000*.30 = 2700 5000*.30 = 1500 After tax annual operating cost 12000(1-.30)= 8400 24600(1-.30)= 17220 Net cost (After tax -tax shield ) 8400-2700 = 5700 17220-1500 = 15720 Present value of Net costnet cost*PVAF@15%,10
5700* 5.01877
= 28606.99
net cost*PVAF@15%,10
15720*5.01877
= 78895.06
Purchase cost 90000 50000 Total cost28606.99+90000
= 118606.99
78895.06+50000
= 128895.06
Per year equated annual cost118606.99 / 5.01877
= 23632.68
128895.06/5.01877
= 25682.60