Firm A is considering replacing an old machine it purchased 4 years ago. At the time, the machine cost $200,000, with an estimated life of 9 years. Straight line depreciation. Salvage value = $20,000. The selling price is estimated to be $10,000 at the end of its life.
Can sell this machine today for $80,000
When the old machine was put into use 4 years ago, it required an increase in NWC of $8,000. The $8,000 will be recovered when the old machine is sold.
Operating Cost: Fixed costs are $24,000 year; annual production is 1000 units of TV, unit price is $300, gross profit margin ((R-VC)/R) is 40%
The new machine that the firm is considering costs $200,000 and would have a useful life of 5 years. Straight-line depreciation. Estimated salvage value of $50,000, which will equal the selling price at that time. Estimated salvage value of $50,000, which will equal the selling price at that time. Using the new machine requires an investment in NWC of $20,000. The $20,000 will be recovered when the new machine is sold.
Operating CF: Installing the new machine would lower fixed costs to $12,000 per year; annual production will increase by 20% while unit price and gross margin stays the same
Information for the firm: Tax rate=40 %, r=10%
What is the change in Operating cost if the firm decides to replace it's old equipment?