Reference no: EM133089393
UOWD Motors must purchase some new machines and needs to evaluate two different types. The first type of machine is the 'Rockbuilt' machine, which costs $74,000 and is top-of-the-range equipment. The machine has a life of 8 years. Maintenance costs of $2,000 a year are expected for the first 4 years, followed by total maintenance and rebuilding costs of $13,000 in the fifth year. This cost is fully tax deductible in the fifth year. During the last 3 years maintenance costs are expected to be $4,000 a year. At the end of the 8 years the machine will have an estimated salvage value of $9,000.
The second type of machine that UOWD Motors is evaluating is the 'Bulldog Machine', which costs $59,000 and has a life of nine years. Maintenance costs will be higher. In the first year they are expected to be $3,000, and this amount is to increase by $1,500 a year until the ninth year. In year 4 the engine will need to be rebuilt, and this will cost the company $15,000 in addition to maintenance costs in that year. This cost will be fully tax deductible in the fourth year. At the end of the 9 years, the 'Bulldog Machine' will have an estimated salvage value of $8,000.
Assuming straight-line depreciation for both types of machines and a 40% tax rate, which of the two types of machines should UOWD Motors purchase. The after-tax required rate of return is 8 percent.
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