1st of the next year. Option One -- Acquire a New Finishing Machine The cost...
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1st of the next year.
Option One -- Acquire a New Finishing Machine
The cost of the machine is $1,000,000, and it will have a useful life of 5 years. Net pre-tax cash flows arising from savings in labor costs will amount to $100,000 per year for 5 years. Depreciation expense will be calculated using the straight-line method for both financial and tax reporting purposes. As an incentive to purchase, Verla will receive a trade-in allowance of $50,000 on its current fully depreciated finishing machine.
Option Two -- Outsource the Finishing Work
Verla can outsource the work to LM, Inc., at a cost of $200,000 per year for 5 years. If it outsources, Verla will scrap its current fully depreciated finishing machine.
Verlas effective income tax rate is 40%. The weighted-average cost of capital is 10%.
The firms net present value of outsourcing the finishing work is
A.
$303,280 net cash outflow.
B.
$404,920 net cash outflow.
C.
$454,920 net cash outflow.
D.
$758,200 net cash outflow
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