Reference no: EM132040362

ALC corp is considering to replace an old machine used in production with a new technically improved one. This old machine has 10 more years of useful life, its current book value is $800,000 and its current market value is $950,000. After 10 years the residual value will be $200,000.   The old machine will be sold if company decides to buy the new machine.

The new technically improved machine costs $2 million. It will be used for 10 years and the residual value will be $500,000. The new machine will have lower operating costs.

The operating costs information for both machines are as follows

                                                            Old machine                        new machine

For first 5 years                               $400,000                              $100,000

For next 3 years                              $450,000                              $180,000

For last 2 years                               $480,000                              $240,000

Both machines will be overhauled after 5 years (end of year 5). If the company continued with old machine the overhaul cost will be $80,000. Overhaul cost for new machine will be $50,000.

The company’s income tax rate is 25%. The required rate is 12%.

Calculate the net after tax cash investment if new machine is purchased.

This is the answer that I got can anyone teel me if this is right or wrong?

initial investment (2,000,000)

(2,000,000)*.25= (500,000)

(2,500,000)

sale of current machn. 950,000

= (1,550,000)