Problem 8 Strong Tool Company has been considering purchasing a new latheas a re
ID: 2770857 • Letter: P
Question
Problem 8
Strong Tool Company has been considering purchasing a new latheas a replacement for a fully depreciated lathe that can last 5 moreyears. The new lathe is expected to have a 5-year life anddepreciation charges of $2,000 in year 1; $3,200 in year 2; $1,900in year 3; $1,200 in both year 4 and year 5; and $500 in year 6.The firm estimates the revenues and expenses (excludingdepreciation and interest) for the new and the old lathes to be asshown in the following table. The firm is subject to a 40% taxrate. Should the new lathe be purchased? The price of the new latheis $ 10,000 and the cost of capital is 10 annually.
Year
New lathe
Old lathe
Revenue
Expenses (excl. depr. and int.)
Revenue
Expenses (excl. depr. and int.)
1
$40,000
$30,000
$35,000
$25,000
2
$41,000
$30,000
$35,000
$25,000
3
$42,000
$30,000
$35,000
$25,000
4
$43,000
$30,000
$35,000
$25,000
5
$44,000
$30,000
$35,000
$25,000
Year
New lathe
Old lathe
Revenue
Expenses (excl. depr. and int.)
Revenue
Expenses (excl. depr. and int.)
1
$40,000
$30,000
$35,000
$25,000
2
$41,000
$30,000
$35,000
$25,000
3
$42,000
$30,000
$35,000
$25,000
4
$43,000
$30,000
$35,000
$25,000
5
$44,000
$30,000
$35,000
$25,000
Explanation / Answer
x.