Question

Please explain step by step.

A new machine can be purchased for $1,000,000. It will cost $165,000 to ship and $135,000 to modify the machine to the company’s intended usage. A $50,000 feasibility study done last year, indicated that the firm can employ an existing factory owned by the firm, which would have otherwise been sold for $150,000 after tax basis. The firm will borrow $750,000 to finance the acquisition. Total interest expense for 5-years is expected to approximate $250,000. What is the cost of the machine for calculating the depreciation in capital budgeting analysis?
$1,000,000
$1,100,000
$1,450,000
$1,300,000
$1,200,000

Answer 1

Cost of machine used for calculating depreciation will be:

Cost of Machine = $1,000,000

Add: Shipping Cost = $165,000

Add: Modification Cost = $135,000

Cost to be used = $1,300,000

Note: The feasibility study already done will not become part of cost of machine. Factory and interest, financing cost will not be included in the cost of machine.

hence, the answer is $1,300,000