21 Jan WRL Company operates a snack food center at the Ha
WRL Company operates a snack food center at the Hartsfield Airport. On January 1, 2003, WRL purchased a special cookie-cutting machine, which has been used for three years. It is January 1, 2006, and WRL is considering whether it should purchase a new, more-efficient cookie-cutting machine. WRL has two options: (1) Continue using the old machine or (2) Sell the old machine and purchase a new machine. The seller of the new machine isn t offering a trade-in. The following information has been obtained: WRL is subject to a 40% income tax rate. Assume that any gain or loss on the sale of machines is treated as an ordinary tax item and will affect the taxes paid by WRL in the year in which it occurs. WRL s after-tax required rate of return is 16%. Assume all cash flows occur at year-end except for initial investment amounts. If you want to use Excel to solve this problem, go to the Excel Lab at www.prenhall.com/ horngren/cost12e and download the template for Problem 21-32. Required 1. You have been asked whether WRL should buy the new machine. To help in your analysis, calculate Required the following: a. One-time after-tax cash effect of disposing of the old machine b. Annual recurring after-tax cash operating savings from using the new machine (variable and fixed) c. Cash tax savings due to differences in annual depreciation of the old machine and the new machine d. Difference in after-tax cash flow from terminal disposal of new machine and old machine. 2.
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