Who dat restaurant is considering the purchase of a $27,000 soufflé maker. the soufflé maker has an economic life of six years and will be fully depreciated by the straight-line method. the machine will produce 2,300 soufflés per year, with each costing $2 to make and priced at $7. assume that the discount rate is 14 percent and the tax rate is 34 percent. should the company make the purchase?

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Business

Tanya Barker

31 December, 06:06

Who dat restaurant is considering the purchase of a $27,000 soufflé maker. the soufflé maker has an economic life of six years and will be fully depreciated by the straight-line method. the machine will produce 2,300 soufflés per year, with each costing $2 to make and priced at $7. assume that the discount rate is 14 percent and the tax rate is 34 percent. should the company make the purchase?

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Bernard Chaney · Answer 1

In this case, a cost-return analysis must be performed. The souffle maker must be justified to be producing more value than it consumes with the purchase. Assuming that the profit on each souffle is $5, the machine will produce $69,000 worth of souffles. If the machine is discounted by 14% and taxed at a rate of 34%, then it will cost $31,114.80. This means that the machine should be purchased, as it makes more money than it costs.