Determination of Cash Flows. The Norman Corporation of Cerritos, CA, maker of a famous electronic component, is considering replacing one of its current hand-operated assembly machines with a new fully automated machine. This replacement would mean the elimination of one employee, generating salary and benefit savings.
Keep:
One full-time machine operator – salary and benefits, $25,000 per year
Cost of maintenance – $2000 per year
Cost of defects – $6000
Original depreciable value of old Machine – $50,000
Annual depreciation – $5000 per yea
Expected life – 10 years
Age – 5 years old
No expected salvage value in 5 years
Current salvage value – $5000
Tax rate – 34 percent
Replace:
Cost of new machine – $60,000
Installation fee – $3000
Transportation charge – $3000
Cost of maintenance – $3000 per year
Cost of defects – $3000 per year
Expected life – 5 years
Salvage value – $20,000
Depreciation method by straight-line