11-23 images A profitable company makingearthmoving equipment is considering aninvestment of $150,000 on equipment thatwill have a 5-year useful life and a $50,000salvage value. Use a spreadsheet to computethe 60% bonus depreciation with the MACRSdepreciation schedule. Show the totaldepreciation taken (=sum()) as well as the PWof the depreciation charges discounted at10%.

Bonus depreciation is an additional depreciation deduction allowed in the first year. MACRS…

Answered: 11-23 images A profitable company…

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

9th Edition

ISBN:9781305635937

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 11P: REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old...

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REPLACEMENT ANALYSIS The Dauten Toy Corporation currently uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is 2,100, and it can be sold for 2/500 at this time. Thus, the annual depreciation expense is 2,100/6 = 350 per year. If the old machine not replaced, it can be sold for 500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. This machine falls into the MACRS 5-year class so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by 1,500 per year. The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dauten's marginal federal-plus-state tax rate is 40%, and its WACC is 11%. Should it replace the old machine?
REPLACEMENT ANALYSIS The Dauten Toy Corporation currently uses an injection molding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is 2,100, and it can be sold for 2,500 at this time. Thus, the annual depreciation expense is 2,100/6 = 350 per year. If the old machine is not replaced, it can be sold for 500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6 years, and an estimated salvage value of 800. This machine falls into the MACRS 5-year class so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine would permit an output expansion, so sales would rise by 1,000 per year; even so, the new machines much greater efficiency would cause operating expenses to decline by 1,500 per year. The new machine would require that inventories be increased by 2,000, but accounts payable would simultaneously increase by 500. Dautens marginal federal-plus-state tax rate is 40%, and its WACC is 15%. Should it replace the old machine?
REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from 24,000 to 46,000 per year. The new machine will cost 80,000; and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 10%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one? Explain your answer.

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