Canada Duck sells a variety of winter coats to individual and retail stores. The company expects to retire all its manufacturing equipment in the new year. At that point, Canada Duck is considering three options: Option 1) It rents its manufacturing equipment at an annual cost of $125,000 per year. Maintenance of equipment costs $8,500 per year. The company pays rent and maintenance at the beginning of each year. Option 2) It rents state-of-the-art manufacturing equipment at an annual cost of $200,000 per year. The company will save $22,000 annually on manufacturing costs. Maintenance of equipment costs $5,000 per year. All costs and savings are incurred at year-end. Option 3) It purchases new equipment for $1,500,000. The equipment is expected to have a life span of 10 years with no salvage value at the end. Canada Duck uses the sum-of-years’-digits depreciation method. The equipment will require maintenance of $1,500 per year. The company will save $46,000 annually on manufacturing costs. Depreciation, maintenance, and manufacturing savings are incurred at year-end. Suppose the discount rate is 3%, the company’s tax rate is 24%, which is a better option for Canada Duck
Canada Duck sells a variety of winter coats to individual and retail stores. The company
expects to retire all its manufacturing equipment in the new year. At that point, Canada
Duck is considering three options:
Option 1) It rents its manufacturing equipment at an annual cost of $125,000 per year.
Maintenance of equipment costs $8,500 per year. The company pays rent and
maintenance at the beginning of each year.
Option 2) It rents state-of-the-art manufacturing equipment at an annual cost of $200,000
per year. The company will save $22,000 annually on
of equipment costs $5,000 per year. All costs and savings are incurred at year-end.
Option 3) It purchases new equipment for $1,500,000. The equipment is expected to
have a life span of 10 years with no salvage value at the end. Canada Duck uses the
sum-of-years’-digits
$1,500 per year. The company will save $46,000 annually on manufacturing costs.
Depreciation, maintenance, and manufacturing savings are incurred at year-end.
Suppose the discount rate is 3%, the company’s tax rate is 24%, which is a better option
for Canada Duck
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