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Finance Week 11 Chapter 10 - Capital Budgeting Decision

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Question;Kaufman Chemical is evaluating the purchase of a new multi-stage centrifugal compressor forits wastewater treatment operation that costs $750,000 and requires $57,000 to install. Thisoutlay would be partially offset by the sale of an existing compressor originally purchased fiveyears ago for $490,000. It is being depreciated using a five-year recovery scheduleunder ACRS and can currently be sold for $150,000. The existing compressor?s maintenancecosts are increasing, and the new compressor could reduce operating costs before depreciationand taxes by $280,000 annually for the next five years. The new equipment will be depreciatedunder a five-year recovery schedule using ACRS. The firm has an 18% cost of capital and a40% tax of ordinary and capital gain income.Evaluate whether Kaufman Chemical should replace its existing wastewater treatmentequipment with the new compressor. (Do not consider the terminal value of the newcompressor in your analysis.)

 

Paper#48401 | Written in 18-Jul-2015

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