Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $50,600, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $75,200 and requires $3,900 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $55,300 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are given in the table attached. . (The second table1894 contains the applicable MACRS depreciation percentages.) Note:The new machine will have no terminal value at the end of 5 years. a. Calculate the initial cash flow associated with replacement of the old machine by the new one. b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.) c. Depict on a time line the net cash flows found in parts (a) and (b) associated with the proposed replacement decision.
Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $50,600, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $75,200 and requires $3,900 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $55,300 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%. The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are given in the table attached. . (The second table1894 contains the applicable MACRS depreciation percentages.) Note:The new machine will have no terminal value at the end of 5 years. a. Calculate the initial cash flow associated with replacement of the old machine by the new one. b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.) c. Depict on a time line the net cash flows found in parts (a) and (b) associated with the proposed replacement decision.
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter7: Operating Assets
Section: Chapter Questions
Problem 41E
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Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $50,600, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $75,200 and requires $3,900 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $55,300 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%.
The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are
The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are
given in the table attached.
.
(The second table1894 contains the applicable MACRS depreciation percentages.) Note:The new machine will have no terminal value at the end of 5 years.a. Calculate the initial cash flow associated with replacement of the old machine by the new one.
b. Determine the periodic cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)
c. Depict on a time line the net cash flows found in parts (a) and (b)
associated with the proposed replacement decision.
associated with the proposed replacement decision.
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