One year ago, Caffe Vita Coffee Roasting Co. purchased three smallbatch coffee roasters for $3.3 million. Now in 2010, the company finds that new roasters are available that offer significant advantages. The new roasters can be purchased for $4.5 million, and have no salvage value. Both the new and the old roasters are expected to last until 2020. Management anticipates that the new roasters will produce a gross margin of $1.2 million a year, so that, using straight-line depreciation, the annual taxable income will be $750,000. The current roasters are expected to produce a gross profit of $600,000 a year and, assuming a total economic life of 11 years and straight-line depreciation, a profit before tax of $300,000. The current market value of the old roasters is $1.5 million. The company’s tax rate is 45 percent, and its minimum acceptable rate of return is 10 percent. Ignoring possible taxes on the sale of used equipment and assuming zero salvage values at the end of the roasters’ economic lives, should Caffe Vita replace its year-old roasters?

 

Alpha Geek

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Status NEW Posted 28 Apr 2017 08:04 AM My Price 7.00

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