The Pittsburgh Steel Company is considering two different wire soldering machines. Machine 1 has an initial cost of $100,000, costs $20,000 to set up, and is expected to be sold for $20,000 after 10 years. Machine 2 has an initial cost of $80,000, costs $30,000 to set up, and is expected to be sold

Question

The Pittsburgh Steel Company is considering two different wire soldering machines. Machine 1 has an initial cost of $100,000, costs $20,000 to set up, and is expected to be sold for $20,000 after 10 years. Machine 2 has an initial cost of $80,000, costs $30,000 to set up, and is expected to be sold for $20,000 after 10 years. Machine 2 has an initial cost of $80,000, costs $30,000 to set up, and is expected to be sold for $10,000 after 10 years. Both machines would be depreciated over 10 years using straight-line depreciation. The company Pittsburgh has a tax rate of 35%.

a. What are the cash flows related to the acquisition of each machine?

b. What are the cash flows related to the disposition of each machine?

a. What are the cash flows related to the acquisition of each machine?

b. What are the cash flows related to the disposition of each machine?

Accepted Answer

The book value at the end of the 10th year is zero for both machines, so the sales price is equivalent to the gain.

	Machine 1	Machine 2
a. Acquisition Initial cost	$100,000	$80,000
Set-up cost	$20,000	$30,000
Total acquisition cash flow	−$120,000	−$110,000
b. Disposition Cash from sale	$20,000	$10,000
Tax on gain	7,000	3,500
Cash flow from disposition	$13,000	$6,500

Question 13.13: The Pittsburgh Steel Company is considering two different wi...

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