ScholarMatic: Explanation & Answer
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You have been asked by the president and CEP of Kidd Pharmaceuticals to evaluate the proposed acquisition of a new labeling machine for one of the firm’s production lines. The machine’s price is $50,000, and it would cost another $10,000 for transportation and installation. The machine falls into the MACRS three-year class, and hence the tax depreciation allowances are 0.33, 0.45, and 0.15 in years 1, 2, and 3, respectively. The machine would be sold after three years because the product line is being closed at that time. The best estimated salvage value after three years of use is $20,000. The machine would have no effect on the firm’s sales or revenue, but it is expected to save Kidd $20,000 per year in before-tax operating cost. The firm’s tax rate is 40% and its corporate cost of capital is 10%.
ScholarMatic: Explanation & Answer
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