Reference no: EM132534357

Assume that Juneidi Company is considering the purchase of a newer, more efficient yogurt-making machine. If purchased, it would require the new machine on January 2, year 1. Juneidi expects to sell 600,000 gallons of yogurt in each of the next five years at a $2 per gallon selling price.

Juneidi has two options:

(1) continue to operate the old machine purchased four years ago or

(2) sell it and purchase the new machine.

The following information has been prepared to help decide which option is more desirable.

                                                                                                Old Machine                      New Machine

Original cost of machine at acquisition                        $ 1,600,000                      $ 2,000,000

Useful life from date of acquisition                                   7 years                        5 years

Expected annual cash operating expenses:

Variable cost per gallon                                                $1.20                         $1.00

Total fixed cash costs                                              $ 400,000                  $ 160,000

Estimated cash value of machines follows:

                                                      Old Machine                          New Machine

January 2, Year 1                                  $ 400,000                       $ 2,000,000

December 31, Year 3                                 $200,000                          0

December 31, Year 5                                        0                        $500,000

Question 1: Juneidi is subject to a 40% income tax rate on all income. Assume the company uses the straight-line method for books and tax purposes. Assume that tax depreciation is calculated without regard to salvage value. Use an after-tax discount rate of 10%.