SAC: Evaluate purchase of new equipment

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SAC is considering the purchase of new equipment to manufacture specialty spark plugs. The new equipment would allow the firm to manufacture 100,000 additional spark plugs per year and is expected to have a useful life of 5 years and to have no salvage value at that time. SAC will depreciate the equipment using the straight-line method. Specialty spark plugs are selling for an average price of $20 and are expected to cost $8 to manufacture with the new equipment. Indirect costs are expected to remain the same. The equipment will cost $3,000,000 to purchase and install. SAC's tax rate is 34%.

% of capital Rate of Return
Stocks 60% 14%
Bonds 40% 6%

SAC is considering the purchase of new equipment to manufacture specialty spark plugs.

Note on Capital Budgeting

Capital budgeting involves taking decision about long term mix of the composition of assets of the business. As per Zen Wealth, "Capital Budgeting is the process by which the firm decides which long-term investments to make. Capital Budgeting projects, i.e., potential long-term investments, are expected to generate cash flows over several years. The decision to accept or reject a Capital Budgeting project depends on an analysis of the cash flows generated by the project and its cost.

Concept of Present value

Present value concept is based on time value of money and is one of the very important topics of finance. As per finance ...