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?
Considering that the current equipment has zero book value and zero salvage value, and that the
new equipment would take five years to make up the initial investment (150,000/30,000=5years)
I would recommend keeping the current 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?
I would recommend getting the new 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?
I would recommend getting the new 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?
As with Part A, I would recommend keeping the old equipment
Rules: Show all calculations. No cut and paste from internet sources, no cutting &
pasting from what others have typed - type in your own words, cite external sources
including your textbook in your blogs, be serious about the discussion, no derogatory
remarks, be polite and open in your discussions, this DB is graded (see your syllabus
for more information) & try to be innovative in your ideas and thoughts.
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